ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INCOME STATEMENTS
| (In millions, except per share amounts) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
| $ | |
|
| $ | |
|
| $ | |
|
| Service and other |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total revenue |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
|
| |
|
|
| |
|
|
| |
|
| Service and other |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total cost of revenue |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Gross margin |
|
| |
|
|
| |
|
|
| |
|
| Research and development |
|
| |
|
|
| |
|
|
| |
|
| Sales and marketing |
|
| |
|
|
| |
|
|
| |
|
| General and administrative |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Operating income |
|
| |
|
|
| |
|
|
| |
|
| Other income, net |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Income before income taxes |
|
| |
|
|
| |
|
|
| |
|
| Provision for income taxes |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Net income |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
| $ | |
|
| $ | |
|
| $ | |
|
| Diluted |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
| |||||||||
| Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
| |
|
|
| |
|
|
| |
|
| Diluted |
|
| |
|
|
| |
|
|
| |
|
|
|
| |||||||||||
Refer to accompanying notes.
57
PART II
Item 8
COMPREHENSIVE INCOME STATEMENTS
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Net income |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net change related to derivatives |
|
| |
|
|
| |
|
|
| ( | ) |
| Net change related to investments |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Translation adjustments and other |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income (loss) |
|
| ( | ) |
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
58
PART II
Item 8
BALANCE SHEETS
| (In millions) |
|
|
|
|
|
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2022 |
|
| 2021 |
| ||
|
|
|
| ||||||
| Assets |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | |
|
| $ | |
|
| Short-term investments |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Total cash, cash equivalents, and short-term investments |
|
| |
|
|
| |
|
| Accounts receivable, net of allowance for doubtful accounts of $ |
|
| |
|
|
| |
|
| Inventories |
|
| |
|
|
| |
|
| Other current assets |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total current assets |
|
| |
|
|
| |
|
| Property and equipment, net of accumulated depreciation of $ |
|
| |
|
|
| |
|
| Operating lease right-of-use assets |
|
| |
|
|
| |
|
| Equity investments |
|
| |
|
|
| |
|
| Goodwill |
|
| |
|
|
| |
|
| Intangible assets, net |
|
| |
|
|
| |
|
| Other long-term assets |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable |
| $ | |
|
| $ | |
|
| Current portion of long-term debt |
|
| |
|
|
| |
|
| Accrued compensation |
|
| |
|
|
| |
|
| Short-term income taxes |
|
| |
|
|
| |
|
| Short-term unearned revenue |
|
| |
|
|
| |
|
| Other current liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total current liabilities |
|
| |
|
|
| |
|
| Long-term debt |
|
| |
|
|
| |
|
| Long-term income taxes |
|
| |
|
|
| |
|
| Long-term unearned revenue |
|
| |
|
|
| |
|
| Deferred income taxes |
|
| |
|
|
| |
|
| Operating lease liabilities |
|
| |
|
|
| |
|
| Other long-term liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Commitments and contingencies |
|
| |
|
|
| |
|
| Stockholders’ equity: |
|
|
|
|
|
|
|
|
| Common stock and paid-in capital – shares authorized |
|
| |
|
|
| |
|
| Retained earnings |
|
| |
|
|
| |
|
| Accumulated other comprehensive income (loss) |
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total stockholders’ equity |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total liabilities and stockholders’ equity |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
59
PART II
Item 8
CASH FLOWS STATEMENTS
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
| |||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Operations |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
| $ | |
|
| $ | |
|
| $ | |
|
| Adjustments to reconcile net income to net cash from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation, amortization, and other |
|
| |
|
|
| |
|
|
| |
|
| Stock-based compensation expense |
|
| |
|
|
| |
|
|
| |
|
| Net recognized gains on investments and derivatives |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Deferred income taxes |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Inventories |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Other current assets |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Other long-term assets |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Accounts payable |
|
| |
|
|
| |
|
|
| |
|
| Unearned revenue |
|
| |
|
|
| |
|
|
| |
|
| Income taxes |
|
| |
|
|
| ( | ) |
|
| ( | ) |
| Other current liabilities |
|
| |
|
|
| |
|
|
| |
|
| Other long-term liabilities |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash from operations |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financing |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash premium on debt exchange |
|
| |
|
|
| ( | ) |
|
| ( | ) |
| Repayments of debt |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Common stock issued |
|
| |
|
|
| |
|
|
| |
|
| Common stock repurchased |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Common stock cash dividends paid |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Other, net |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in financing |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investing |
|
|
|
|
|
|
|
|
|
|
|
|
| Additions to property and equipment |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Acquisition of companies, net of cash acquired, and purchases of intangible and other assets |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Purchases of investments |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Maturities of investments |
|
| |
|
|
| |
|
|
| |
|
| Sales of investments |
|
| |
|
|
| |
|
|
| |
|
| Other, net |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effect of foreign exchange rates on cash and cash equivalents |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change in cash and cash equivalents |
|
| ( | ) |
|
| |
|
|
| |
|
| Cash and cash equivalents, beginning of period |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents, end of period |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
60
PART II
Item 8
STOCKHOLDERS’ EQUITY STATEMENTS
| (In millions, except per share amounts) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Common stock and paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of period |
| $ | |
|
| $ | |
|
| $ | |
|
| Common stock issued |
|
| |
|
|
| |
|
|
| |
|
| Common stock repurchased |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Stock-based compensation expense |
|
| |
|
|
| |
|
|
| |
|
| Other, net |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of period |
|
| |
|
|
| |
|
|
| |
|
| Net income |
|
| |
|
|
| |
|
|
| |
|
| Common stock cash dividends |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Common stock repurchased |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Cumulative effect of accounting changes |
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, beginning of period |
|
| |
|
|
| |
|
|
| ( | ) |
| Other comprehensive income (loss) |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Cumulative effect of accounting changes |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
|
| ( | ) |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total stockholders’ equity |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash dividends declared per common share |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to accompanying notes.
61
PART II
Item 8
NOTES TO FINANCIAL STATEMENTS
NOTE 1 — ACCOUNTING POLICIES
Accounting Principles
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
We have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.
Estimates and Assumptions
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties.
In July 2022, we completed an assessment of the useful lives of our server and network equipment. Due to investments in software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, we determined we should increase the estimated useful lives of both server and network equipment from
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income.
Revenue
Product Revenue and Service and Other Revenue
Product revenue includes sales from operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.
62
PART II
Item 8
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Products and Services
Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.
Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.
Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.
Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.
Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.
Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.
Significant Judgments
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.
63
PART II
Item 8
Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.
Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.
Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.
Contract Balances and Other Receivables
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.
Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future, LinkedIn subscriptions, Office 365 subscriptions, Xbox subscriptions, Windows post-delivery support, Dynamics business solutions, and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.
Refer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.
As of June 30, 2022 and 2021, other receivables due from suppliers were $
As of June 30, 2022 and 2021, long-term accounts receivable, net of allowance for doubtful accounts, was $
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.
64
PART II
Item 8
Activity in the allowance for doubtful accounts was as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended June 30, |
|
| 2022 |
|
|
| 2021 |
|
|
| 2020 |
|
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, beginning of period |
| $ | |
|
| $ | |
|
| $ | |
|
| Charged to costs and other |
|
| |
|
|
| |
|
|
| |
|
| Write-offs |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts included in our consolidated balance sheets:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
|
| 2022 |
|
|
| 2021 |
|
|
| 2020 |
|
|
|
|
|
|
|
|
|
|
|
| |||
| Accounts receivable, net of allowance for doubtful accounts |
| $ | |
|
| $ | |
|
| $ | |
|
| Other long-term assets |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2022 and 2021, our financing receivables, net were $
Assets Recognized from Costs to Obtain a Contract with a Customer
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets.
We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.
Cost of Revenue
Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.
Product Warranty
We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
65
PART II
Item 8
Research and Development
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
Sales and Marketing
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $
Stock-Based Compensation
Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.
Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.
Income Taxes
Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.
Financial Instruments
Investments
We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.
66
PART II
Item 8
Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.
Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.
Derivatives
Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.
For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.
For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.
Fair Value Measurements
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
|
| • | Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges. |
|
| • | Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities include certain over-the-counter forward, option, and swap contracts. |
67
PART II
Item 8
|
| • | Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. |
We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Inventories
Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use,
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
68
PART II
Item 8
Intangible Assets
Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from
Recent Accounting Guidance
Accounting for Income Taxes
In December 2019, the Financial Accounting Standards Board issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. We adopted the standard effective July 1, 2021. Adoption of the standard did not have a material impact on our consolidated financial statements.
NOTE 2 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
The components of basic and diluted EPS were as follows:
| (In millions, except earnings per share) |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income available for common shareholders (A) |
| $ | |
|
| $ | |
|
| $ | |
|
| Weighted average outstanding shares of common stock (B) |
|
| |
|
|
| |
|
|
| |
|
| Dilutive effect of stock-based awards |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock and common stock equivalents (C) |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic (A/B) |
| $ | |
|
| $ | |
|
| $ | |
|
| Diluted (A/C) |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.
NOTE 3 — OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Interest and dividends income |
| $ | |
|
| $ | |
|
| $ | |
|
| Interest expense |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Net recognized gains on investments |
|
| |
|
|
| |
|
|
| |
|
| Net gains (losses) on derivatives |
|
| ( | ) |
|
| |
|
|
| |
|
| Net gains (losses) on foreign currency remeasurements |
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Other, net |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
PART II
Item 8
Net Recognized Gains (Losses) on Investments
Net recognized gains (losses) on debt investments were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Realized gains from sales of available-for-sale securities |
| $ | |
|
| $ | |
|
| $ | |
|
| Realized losses from sales of available-for-sale securities |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Impairments and allowance for credit losses |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized gains (losses) on equity investments were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Net realized gains on investments sold |
| $ | |
|
| $ | |
|
| $ | |
|
| Net unrealized gains on investments still held |
|
| |
|
|
| |
|
|
| |
|
| Impairments of investments |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
PART II
Item 8
NOTE 4 — INVESTMENTS
Investment Components
The components of investments were as follows:
| (In millions) |
| Fair Value Level |
|
| Adjusted Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
| Short-term Investments |
|
| Equity Investments |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial paper |
|
| Level 2 |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Certificates of deposit |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. government securities |
|
| Level 1 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. agency securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Foreign government bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Mortgage- and asset-backed securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total debt investments |
|
|
|
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity investments |
|
| Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Equity investments |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
PART II
Item 8
| (In millions) |
| Fair Value Level |
|
| Adjusted Cost Basis |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Recorded Basis |
|
| Cash and Cash Equivalents |
| Short-term Investments |
|
| Equity Investments |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial paper |
|
| Level 2 |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Certificates of deposit |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. government securities |
|
| Level 1 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| U.S. agency securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Foreign government bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Mortgage- and asset-backed securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Corporate notes and bonds |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 2 |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Municipal securities |
|
| Level 3 |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total debt investments |
|
|
|
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in Fair Value Recorded in Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity investments |
|
| Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Equity investments |
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivatives, net (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2022 and 2021, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $
Unrealized Losses on Debt Investments
Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
| Total |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| (In millions) |
| Fair Value |
|
| Unrealized |
|
| Fair Value |
|
| Unrealized |
|
| Total |
|
| ||||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| U.S. government and agency securities |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| Foreign government bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Mortgage- and asset-backed securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Corporate notes and bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Municipal securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
PART II
Item 8
|
|
| Less than 12 Months |
|
| 12 Months or Greater |
|
|
|
|
|
|
| Total |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| (In millions) |
|
| Fair Value |
|
|
| Unrealized |
|
|
| Fair Value |
|
|
| Unrealized |
|
|
| Total |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. government and agency securities |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
| Foreign government bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Mortgage- and asset-backed securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Corporate notes and bonds |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Municipal securities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence.
Debt Investment Maturities
| (In millions) |
| Adjusted Cost Basis |
|
| Estimated Fair Value |
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Due in one year or less |
| $ | |
|
| $ | |
|
| Due after one year through five years |
|
| |
|
|
| |
|
| Due after five years through 10 years |
|
| |
|
|
| |
|
| Due after 10 years |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 — DERIVATIVES
We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.
Foreign Currencies
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.
Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.
Interest Rate
Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.
73
PART II
Item 8
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Equity
Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit-Risk-Related Contingent Features
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $
The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:
| (In millions) |
| June 30, 2022 |
|
| June 30, 2021 |
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Foreign exchange contracts purchased |
| $ | |
|
| $ | |
|
| Foreign exchange contracts sold |
|
| |
|
|
| |
|
| Interest rate contracts purchased |
|
| |
|
|
| |
|
|
|
|
| ||||||
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Foreign exchange contracts purchased |
|
| |
|
|
| |
|
| Foreign exchange contracts sold |
|
| |
|
|
| |
|
| Other contracts purchased |
|
| |
|
|
| |
|
| Other contracts sold |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
PART II
Item 8
Fair Values of Derivative Instruments
The following table presents our derivative instruments:
|
|
| Derivative |
| Derivative |
| Derivative |
| Derivative |
| |||||||
| (In millions) |
| Assets |
| Liabilities |
| Assets |
| Liabilities |
| |||||||
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2022 |
| June 30, 2021 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
| Interest rate contracts |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Not Designated as Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Other contracts |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross amounts of derivatives |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Gross amounts of derivatives offset in the balance sheet |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
| |
|
| Cash collateral received |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net amounts of derivatives |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reported as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Short-term investments |
| $ | |
|
| $ | 0 |
|
| $ | |
|
| $ | 0 |
|
| Other current assets |
|
| |
|
|
| 0 |
|
|
| |
|
|
| 0 |
|
| Other long-term assets |
|
| |
|
|
| 0 |
|
|
| |
|
|
| 0 |
|
| Other current liabilities |
|
| 0 |
|
|
| ( | ) |
|
| 0 |
|
|
| ( | ) |
| Other long-term liabilities |
|
| 0 |
|
|
| ( | ) |
|
| 0 |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $
The following table presents the fair value of our derivatives instruments on a gross basis:
| (In millions) |
| Level 1 |
|
|
| Level 2 |
|
| Level 3 |
|
| Total |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative assets |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| Derivative liabilities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivative assets |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Derivative liabilities |
|
| |
|
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
PART II
Item 8
Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Designated as Fair Value Hedging Instruments |
|
|
| |||||||||
|
|
|
|
| |||||||||
| Foreign exchange contracts |
|
|
| |||||||||
| Derivatives |
| $ | |
|
| $ | |
|
| $ | |
|
| Hedged items |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Excluded from effectiveness assessment |
|
| |
|
|
| |
|
|
| |
|
| Interest rate contracts |
|
|
| |||||||||
| Derivatives |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Hedged items |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Designated as Cash Flow Hedging Instruments |
|
|
| |||||||||
|
|
|
|
| |||||||||
| Foreign exchange contracts |
|
|
| |||||||||
| Amount reclassified from accumulated other comprehensive income |
|
| ( | ) |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Not Designated as Hedging Instruments |
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign exchange contracts |
|
| |
|
|
| |
|
|
| ( | ) |
| Other contracts |
|
| ( | ) |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Designated as Cash Flow Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| Included in effectiveness assessment |
| $ | ( | ) |
| $ | |
|
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
NOTE 6 — INVENTORIES
The components of inventories were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2022 |
|
| 2021 |
| ||
|
|
|
| ||||||
| Raw materials |
| $ | |
|
| $ | |
|
| Work in process |
|
| |
|
|
| |
|
| Finished goods |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
76
PART II
Item 8
NOTE 7 — PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
| (In millions) |
| |||||||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2022 |
|
| 2021 |
| ||
|
|
|
| ||||||
| Land |
| $ | |
|
| $ | |
|
| Buildings and improvements |
|
| |
|
|
| |
|
| Leasehold improvements |
|
| |
|
|
| |
|
| Computer equipment and software |
|
| |
|
|
| |
|
| Furniture and equipment |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, at cost |
|
| |
|
|
| |
|
| Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total, net |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
During fiscal years 2022, 2021, and 2020, depreciation expense was $
NOTE 8 — BUSINESS COMBINATIONS
Nuance Communications, Inc.
On
The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.
The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:
| (In millions) |
|
|
|
| ||||
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Goodwill (a) |
|
| $ | |
| |||
| Intangible assets |
|
|
| |
| |||
| Other assets |
|
|
| |
| |||
| Other liabilities (b) |
|
|
| ( | ) | |||
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
|
| $ | |
| |||
|
|
|
|
|
|
|
|
|
|
| (a) | |
| (b) | |
77
PART II
Item 8
Following are the details of the purchase price allocated to the intangible assets acquired:
| (In millions, except average life) |
| Amount |
|
| Weighted Average Life |
| |||
|
|
|
| |||||||
|
|
|
| |||||||
| Customer-related |
| $ | |
|
| |
| ||
| Technology-based |
|
| |
|
| |
| ||
| Marketing-related |
|
| |
|
| |
| ||
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
| ||||
| Total |
| $ | |
|
| |
| ||
|
|
|
|
|
|
|
|
|
| |
ZeniMax Media Inc.
On
The allocation of the purchase price to goodwill was completed as of December 31, 2021. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:
| (In millions) |
|
|
|
| ||||
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Cash and cash equivalents |
|
| $ | |
| |||
| Goodwill |
|
|
| |
| |||
| Intangible assets |
|
|
| |
| |||
| Other assets |
|
|
| |
| |||
| Other liabilities |
|
|
| ( | ) | |||
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
|
| $ | |
| |||
|
|
|
|
|
|
|
|
|
|
Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of ZeniMax. None of the goodwill is expected to be deductible for income tax purposes.
Following are details of the purchase price allocated to the intangible assets acquired:
| (In millions, except average life) |
| Amount |
|
| Weighted Average Life |
| |||
|
|
|
| |||||||
|
|
|
| |||||||
| Technology-based |
| $ | |
|
| |
| ||
| Marketing-related |
|
| |
|
| |
| ||
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
| ||||
| Total |
| $ | |
|
| |
| ||
|
|
|
|
|
|
|
|
|
| |
Activision Blizzard, Inc.
On
78
PART II
Item 8
NOTE 9 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
| (In millions) |
|
| June 30, 2020 |
|
|
| Acquisitions |
|
|
| Other |
|
|
| June 30, 2021 |
|
|
| Acquisitions |
|
|
| Other |
|
|
|
| June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| | (b) |
|
| |
| (b) |
|
| |
|
| More Personal Computing |
|
| |
|
|
| | (a) |
|
| | (a) |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | |
|
| $ | ( | ) |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
| (b) | |
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.
Goodwill Impairment
We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.
NOTE 10 — INTANGIBLE ASSETS
The components of intangible assets, all of which are finite-lived, were as follows:
| (In millions) |
| Gross |
|
| Accumulated |
|
| Net Carrying |
|
| Gross |
|
| Accumulated |
|
| Net Carrying |
| ||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| June 30, |
|
|
|
|
|
|
| 2022 |
|
|
|
|
|
|
|
| 2021 |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| Technology-based |
| $ | |
|
| $ | ( | ) |
| $ | |
|
| $ | |
|
| $ | ( | ) |
| $ | |
|
| Customer-related |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
| Marketing-related |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
| Contract-based |
|
| |
|
|
| ( | ) |
|
| |
|
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | | (a) |
| $ | ( | ) |
| $ | |
|
| $ | | (b) |
| $ | ( | ) |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes intangible assets of $ |
| (b) | |
No material impairments of intangible assets were identified during fiscal years 2022, 2021, or 2020. We estimate that we have no significant residual value related to our intangible assets.
79
PART II
Item 8
The components of intangible assets acquired during the periods presented were as follows:
| (In millions) |
| Amount |
|
| Weighted Average Life |
|
| Amount |
|
| Weighted Average Life |
| ||||
|
|
| |||||||||||||||
|
|
|
|
|
|
| |||||||||||
| Year Ended June 30, |
| 2022 |
|
|
|
|
| 2021 |
|
|
|
| ||||
|
|
|
|
|
| ||||||||||||
| Technology-based |
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
| Customer-related |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Marketing-related |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Contract-based |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization expense was $
The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2022:
| (In millions) |
|
|
| |
|
|
| |||
|
|
|
| ||
| Year Ending June 30, |
|
|
|
|
|
|
| |||
| 2023 |
| $ | |
|
| 2024 |
|
| |
|
| 2025 |
|
| |
|
| 2026 |
|
| |
|
| 2027 |
|
| |
|
| Thereafter |
|
| |
|
|
|
| |||
|
|
|
|
|
|
| Total |
| $ | |
|
|
|
|
|
|
|
80
PART II
Item 8
NOTE 11 — DEBT
The components of debt were as follows:
| (In millions, issuance by calendar year) |
| Maturities (calendar year) |
| Stated Interest Rate |
|
| Effective Interest Rate |
| June 30, 2022 |
|
| June 30, 2021 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
| $ | |
|
| $ | |
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
| |
|
| | – | |
|
| | – | |
|
| | – | |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Total face value |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
| ||||||
| Unamortized discount and issuance costs |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
| Hedge fair value adjustments (b) |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| |
| ||||||
| Premium on debt exchange (a) |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Total debt |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
| ||||||
| Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Long-term debt |
|
|
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| (a) | |
| (b) | |
As of June 30, 2022 and 2021, the estimated fair value of long-term debt, including the current portion, was $
Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2022, 2021, and 2020 was $
The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2022:
| (In millions) |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ending June 30, |
|
|
|
|
|
|
|
|
|
|
| 2023 |
| $ | |
|
| 2024 |
|
| |
|
| 2025 |
|
| |
|
| 2026 |
|
| |
|
| 2027 |
|
| |
|
| Thereafter |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
|
|
|
|
|
|
81
PART II
Item 8
NOTE 12 — INCOME TAXES
Provision for Income Taxes
The components of the provision for income taxes were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Current Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | |
|
| $ | |
|
| $ | |
|
| U.S. state and local |
|
| |
|
|
| |
|
|
| |
|
| Foreign |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. federal |
| $ | ( | ) |
| $ | |
|
| $ | |
|
| U.S. state and local |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Foreign |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred taxes |
| $ | ( | ) |
| $ | ( | ) |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and foreign components of income before income taxes were as follows:
| (In millions) |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| U.S. |
| $ | |
|
| $ | |
|
| $ | |
|
| Foreign |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Federal statutory rate |
|
| | % |
|
| | % |
|
| | % |
| Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign earnings taxed at lower rates |
|
| ( | % |
|
| ( | % |
|
| ( | % |
| Impact of intangible property transfers |
|
| ( | % |
|
| | % |
|
| | % |
| Foreign-derived intangible income deduction |
|
| ( | % |
|
| ( | % |
|
| ( | % |
| State income taxes, net of federal benefit |
|
| | % |
|
| | % |
|
| | % |
| Research and development credit |
|
| ( | % |
|
| ( | % |
|
| ( | % |
| Excess tax benefits relating to stock-based compensation |
|
| ( | % |
|
| ( | % |
|
| ( | % |
| Interest, net |
|
| | % |
|
| | % |
|
| | % |
| Other reconciling items, net |
|
| ( | % |
|
| ( | % |
|
| | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effective rate |
|
| | % |
|
| | % |
|
| | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of fiscal year 2022, we transferred certain intangible properties from our Puerto Rico subsidiary to the U.S. The transfer of intangible properties resulted in a $
82
PART II
Item 8
We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $
The decrease from the federal statutory rate in fiscal year 2022 is primarily due to the net income tax benefit related to the transfer of intangible properties, earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2021 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes. The decrease from the federal statutory rate in fiscal year 2020 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, and tax benefits relating to stock-based compensation. In fiscal years 2022, 2021, and 2020, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated
The decrease in our effective tax rate for fiscal year 2022 compared to fiscal year 2021 was primarily due to a $
83
PART II
Item 8
The components of the deferred income tax assets and liabilities were as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| June 30, |
| 2022 |
|
| 2021 |
| ||
|
|
|
| ||||||
| Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Stock-based compensation expense |
| $ | |
|
| $ | |
|
| Accruals, reserves, and other expenses |
|
| |
|
|
| |
|
| Loss and credit carryforwards |
|
| |
|
|
| |
|
| Amortization |
|
| |
|
|
| |
|
| Leasing liabilities |
|
| |
|
|
| |
|
| Unearned revenue |
|
| |
|
|
| |
|
| Other |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax assets |
|
| |
|
|
| |
|
| Less valuation allowance |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax assets, net of valuation allowance |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred Income Tax Liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Book/tax basis differences in investments and debt |
| $ | ( | ) |
| $ | ( | ) |
| Leasing assets |
|
| ( | ) |
|
| ( | ) |
| Depreciation |
|
| ( | ) |
|
| ( | ) |
| Deferred tax on foreign earnings |
|
| ( | ) |
|
| ( | ) |
| Other |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred income tax liabilities |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net deferred income tax assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Reported As |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Other long-term assets |
| $ | |
|
| $ | |
|
| Long-term deferred income tax liabilities |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net deferred income tax assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.
As of June 30, 2022, we had federal, state, and foreign net operating loss carryforwards of $
The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards, federal capital loss carryforwards, and other net deferred tax assets that may not be realized.
Income taxes paid, net of refunds, were $
Uncertain Tax Positions
Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2022, 2021, and 2020, were $
84
PART II
Item 8
As of June 30, 2022, 2021, and 2020, we had accrued interest expense related to uncertain tax positions of $
The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Beginning unrecognized tax benefits |
| $ | |
|
| $ | |
|
| $ | |
|
| Decreases related to settlements |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Increases for tax positions related to the current year |
|
| |
|
|
| |
|
|
| |
|
| Increases for tax positions related to prior years |
|
| |
|
|
| |
|
|
| |
|
| Decreases for tax positions related to prior years |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
| Decreases due to lapsed statutes of limitations |
|
| |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending unrecognized tax benefits |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years
As of June 30, 2022, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.
We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years
NOTE 13 — UNEARNED REVENUE
Unearned revenue by segment was as follows:
| (In millions) |
|
|
|
|
|
| ||
|
|
| |||||||
|
|
|
|
| |||||
| June 30, |
| 2022 |
|
| 2021 |
| ||
|
|
|
| ||||||
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
| |||
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
Changes in unearned revenue were as follows:
| (In millions) |
|
|
|
| |
|
|
| ||||
|
|
|
|
|
| |
| Year Ended June 30, 2022 |
|
|
|
|
|
|
|
|
| |||
| Balance, beginning of period |
|
| $ | |
|
| Deferral of revenue |
|
|
| |
|
| Recognition of unearned revenue |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
|
| $ | |
|
|
|
|
|
|
|
|
85
PART II
Item 8
Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $
NOTE 14 — LEASES
We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of
The components of lease expense were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||
| Year Ended June 30, |
| 2022 |
|
|
| 2021 |
|
|
| 2020 |
| |
|
|
|
|
|
|
|
|
|
|
| |||
| Operating lease cost |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization of right-of-use assets |
| $ | |
|
| $ | |
|
| $ | |
|
| Interest on lease liabilities |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total finance lease cost |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information related to leases was as follows:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||
| Year Ended June 30, |
| 2022 |
|
|
| 2021 |
|
|
| 2020 |
| |
|
|
|
|
|
|
|
|
|
|
| |||
| Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating cash flows from operating leases |
| $ | |
|
| $ | |
|
| $ | |
|
| Operating cash flows from finance leases |
|
| |
|
|
| |
|
|
| |
|
| Financing cash flows from finance leases |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
| Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
PART II
Item 8
Supplemental balance sheet information related to leases was as follows:
| (In millions, except lease term and discount rate) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
| ||||||
| June 30, |
| 2022 |
|
| 2021 |
| ||
|
|
|
| ||||||
| Operating Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating lease right-of-use assets |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | |
|
| $ | |
|
| Operating lease liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating lease liabilities |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Finance Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, at cost |
| $ | |
|
| $ | |
|
| Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment, net |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
| $ | |
|
| $ | |
|
| Other long-term liabilities |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total finance lease liabilities |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Remaining Lease Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average Discount Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating leases |
|
| |
|
|
| |
|
| Finance leases |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
The following table outlines maturities of our lease liabilities as of June 30, 2022:
| (In millions) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Year Ending June 30, |
| Operating Leases |
|
| Finance Leases |
| ||
|
|
|
| ||||||
| 2023 |
| $ | |
|
| $ | |
|
| 2024 |
|
| |
|
|
| |
|
| 2025 |
|
| |
|
|
| |
|
| 2026 |
|
| |
|
|
| |
|
| 2027 |
|
| |
|
|
| |
|
| Thereafter |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total lease payments |
|
| |
|
|
| |
|
| Less imputed interest |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2022, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $
87
PART II
Item 8
NOTE 15 — CONTINGENCIES
Antitrust Litigation and Claims
China State Administration for Market Regulation Investigation
In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. In 2019, the SAMR presented preliminary views as to certain possible violations of China’s Anti-Monopoly Law.
Product-Related Litigation
U.S. Cell Phone Litigation
Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 46 lawsuits, including 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.
In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing on general causation is scheduled for September of 2022.
Other Contingencies
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
As of June 30, 2022, we accrued aggregate legal liabilities of $
88
PART II
Item 8
NOTE 16 — STOCKHOLDERS’ EQUITY
Shares Outstanding
Shares of common stock outstanding were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Balance, beginning of year |
|
| |
|
|
| |
|
|
| |
|
| Issued |
|
| |
|
|
| |
|
|
| |
|
| Repurchased |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of year |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchases
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $
On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $
On September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $
We repurchased the following shares of common stock under the share repurchase programs:
| (In millions) |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
| ||||||
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||
| Year Ended June 30, |
|
2022 |
|
|
2021 |
|
|
2020 |
| |||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
| First Quarter |
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
| Second Quarter |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Third Quarter |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| Fourth Quarter |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| Total |
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
|
| |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All repurchases were made using cash resources. Shares repurchased during the fourth and third quarters of fiscal year 2022 were under the share repurchase program approved on September 14, 2021. Shares repurchased during the second quarter of fiscal year 2022 were under the share repurchase programs approved on both September 14, 2021 and September 18, 2019. Shares repurchased during the first quarter of fiscal year 2022, fiscal year 2021, and the fourth quarter of fiscal year 2020 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $
89
PART II
Item 8
Dividends
Our Board of Directors declared the following dividends:
| Declaration Date | Record Date |
|
| Payment Date |
| Dividend Per Share |
|
| Amount |
| ||||||
|
|
| |||||||||||||||
|
|
| |||||||||||||||
| Fiscal Year 2022 |
|
|
|
|
|
|
|
| (In millions) |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
| |
|
| $ | |
|
| $ | |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
| |
|
| $ | |
|
| $ | |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dividend declared on June 14, 2022 was included in other current liabilities as of June 30, 2022.
90
PART II
Item 8
NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | |
|
| Unrealized gains (losses), net of tax of $( |
|
| ( | ) |
|
| |
|
|
| ( | ) |
| Reclassification adjustments for (gains) losses included in other income (expense), net |
|
| |
|
|
| ( | ) |
|
| |
|
| Tax expense (benefit) included in provision for income taxes |
|
| ( | ) |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts reclassified from accumulated other comprehensive income (loss) |
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change related to derivatives, net of tax of $ |
|
| |
|
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, end of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | |
|
| $ | |
|
| $ | |
|
| Unrealized gains (losses), net of tax of $( |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Reclassification adjustments for (gains) losses included in other income (expense), net |
|
| |
|
|
| ( | ) |
|
| |
|
| Tax expense (benefit) included in provision for income taxes |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Amounts reclassified from accumulated other comprehensive income (loss) |
|
| |
|
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Net change related to investments, net of tax of $( |
|
| ( | ) |
|
| ( | ) |
|
| |
|
| Cumulative effect of accounting changes |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | ( | ) |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
| |||||||||
| Translation Adjustments and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Balance, beginning of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| Translation adjustments and other, net of tax of $ |
|
| ( | ) |
|
| |
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Balance, end of period |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Accumulated other comprehensive income (loss), end of period |
| $ | ( | ) |
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS
We grant stock-based compensation to employees and directors. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.
Stock-based compensation expense and related income tax benefits were as follows:
| (In millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Stock-based compensation expense |
| $ | |
|
| $ | |
|
| $ | |
|
| Income tax benefits related to stock-based compensation |
|
| |
|
|
| |
|
|
| |
|
|
|
| |||||||||||
Stock Plans
Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of
91
PART II
Item 8
Executive Incentive Plan
Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of
Activity for All Stock Plans
The fair value of stock awards was estimated on the date of grant using the following assumptions:
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
| Year ended June 30, |
|
|
|
| 2022 |
|
|
|
|
| 2021 |
|
|
|
|
| 2020 |
| |
|
|
|
|
|
|
| ||||||||||||||
| Dividends per share (quarterly amounts) |
| $ | | – | |
| $ |
| | – | |
|
| $ | | – | |
| |
| Interest rates |
|
| | – | |
|
|
| | – | |
|
|
| | – | |
| |
|
|
|
|
| ||||||||||||||||
During fiscal year 2022, the following activity occurred under our stock plans:
| Shares |
|
| Weighted Average Grant-Date Fair Value |
| ||||
|
|
| |||||||
|
|
| |||||||
| (In millions) |
|
|
|
| ||||
|
| ||||||||
| Stock Awards |
| |||||||
|
|
|
| ||||||
| Nonvested balance, beginning of year |
|
| |
|
| $ | |
|
| Granted (a) |
|
| |
|
|
| |
|
| Vested |
|
| ( | ) |
|
| |
|
| Forfeited |
|
| ( | ) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nonvested balance, end of year |
|
| |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
| (a) | |
As of June 30, 2022, there was approximately $
Employee Stock Purchase Plan
We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at
| (Shares in millions) |
|
|
|
|
|
|
|
|
| |||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Shares purchased |
|
| |
|
|
| |
|
|
| |
|
| Average price per share |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
| |||||||||||
As of June 30, 2022,
92
PART II
Item 8
Savings Plans
We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We match a portion of each dollar a participant contributes into the plans. Employer-funded retirement benefits for all plans were $
NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
Our reportable segments are described below.
Productivity and Business Processes
Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:
|
| • | Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Microsoft Viva. |
|
| • | Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other Office services. |
|
| • | LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions. |
|
| • | Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Customer Insights, Power Apps, and Power Automate; and on-premises ERP and CRM applications. |
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:
|
| • | Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub. |
|
| • | Enterprise Services, including Enterprise Support Services, Microsoft Consulting Services, and Nuance professional services. |
More Personal Computing
Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:
|
| • | Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things. |
|
| • | Devices, including Surface and PC accessories. |
|
| • | Gaming, including Xbox hardware and Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, third-party disc royalties, advertising, and other cloud services. |
|
| • | Search and news advertising. |
93
PART II
Item 8
Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.
In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated.
Segment revenue and operating income were as follows during the periods presented:
| (In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
| |||||||||||
| Year Ended June 30, |
|
| 2022 |
|
|
| 2021 |
|
|
| 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Productivity and Business Processes |
| $ | |
|
| $ | |
|
| $ | |
|
| Intelligent Cloud |
|
| |
|
|
| |
|
|
| |
|
| More Personal Computing |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| United States (a) |
| $ | |
|
| $ | |
|
| $ | |
|
| Other countries |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) | Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue. |
94
PART II
Item 8
Revenue, classified by significant product and service offerings, was as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| Year Ended June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| Server products and cloud services |
| $ | |
|
| $ | |
|
| $ | |
|
| Office products and cloud services |
|
| |
|
|
| |
|
|
| |
|
| Windows |
|
| |
|
|
| |
|
|
| |
|
| Gaming |
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
| Search and news advertising |
|
| |
|
|
| |
|
|
| |
|
| Enterprise Services |
|
| |
|
|
| |
|
|
| |
|
| Devices |
|
| |
|
|
| |
|
|
| |
|
| Other |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have recast certain previously reported amounts in the table above to conform to the way we internally manage and monitor our business.
Our Microsoft Cloud (formerly commercial cloud) revenue, which includes Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $
Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.
Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:
| (In millions) |
|
|
| |||||||||
|
|
| |||||||||||
|
|
|
|
|
| ||||||||
| June 30, |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| |||||||||
| United States |
| $ | |
|
| $ | |
|
| $ | |
|
| Ireland |
|
| |
|
|
| |
|
|
| |
|
| Other countries |
|
| |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | |
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
PART II
Item 8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Microsoft Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2022 and 2021, the related consolidated statements of income, comprehensive income, cash flows, and stockholders\' equity, for each of the three years in the period ended June 30, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company\'s internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 28, 2022, expressed an unqualified opinion on the Company\'s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company\'s management. Our responsibility is to express an opinion on the Company\'s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
96
PART II
Item 8
Revenue Recognition – Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.
Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
|
| • | Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services. |
|
|
| • | The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. |
|
|
| • | Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services). |
|
|
| • | Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. |
|
Given these factors and due to the volume of transactions, the related audit effort in evaluating management\'s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company\'s revenue recognition for these customer agreements included the following:
|
| • | We tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration. |
|
|
| • | We evaluated management\'s significant accounting policies related to these customer agreements for reasonableness. |
|
|
| • | We selected a sample of customer agreements and performed the following procedures: |
|
|
| - | Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement. |
|
|
| - | Tested management\'s identification and treatment of contract terms. |
|
|
| - | Assessed the terms in the customer agreement and evaluated the appropriateness of management\'s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. |
|
|
| • | We evaluated the reasonableness of management\'s estimate of stand-alone selling prices for products and services that are not sold separately. |
|
|
| • | We tested the mathematical accuracy of management\'s calculations of revenue and the associated timing of revenue recognized in the financial statements. |
|
97
PART II
Item 8
Income Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements
Critical Audit Matter Description
The Company\'s long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service ("IRS"). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company\'s financial statements.
Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management\'s estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures to evaluate management\'s estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:
|
| • | We evaluated the appropriateness and consistency of management\'s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. |
|
|
| • | We read and evaluated management\'s documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. |
|
|
| • | We tested the reasonableness of management\'s judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions. |
|
|
| • | For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions. |
|
|
| • | We evaluated the reasonableness of management\'s estimates by considering how tax law, including statutes, regulations and case law, impacted management\'s judgments. |
|
/s/
July 28, 2022
We have served as the Company\'s auditor since 1983.
98
PART II
Item 9, 9A
', 'text': ' ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA \n\nINCOME STATEMENTS\n\n \n\n##TABLE_START (In millions, except per share amounts)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nRevenue:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nProduct\n\n \n\n$\n\n72,732 \n\n \n\n \n\n$\n\n71,074 \n\n \n\n \n\n$\n\n68,041 \n\n \n\nService and other\n\n \n\n \n\n125,538 \n\n \n\n \n\n \n\n97,014 \n\n \n\n \n\n \n\n74,974 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal revenue\n\n \n\n \n\n198,270 \n\n \n\n \n\n \n\n168,088 \n\n \n\n \n\n \n\n143,015 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCost of revenue:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nProduct\n\n \n\n \n\n19,064 \n\n \n\n \n\n \n\n18,219 \n\n \n\n \n\n \n\n16,017 \n\n \n\nService and other\n\n \n\n \n\n43,586 \n\n \n\n \n\n \n\n34,013 \n\n \n\n \n\n \n\n30,061 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal cost of revenue\n\n \n\n \n\n62,650 \n\n \n\n \n\n \n\n52,232 \n\n \n\n \n\n \n\n46,078 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nGross margin\n\n \n\n \n\n135,620 \n\n \n\n \n\n \n\n115,856 \n\n \n\n \n\n \n\n96,937 \n\n \n\nResearch and development\n\n \n\n \n\n24,512 \n\n \n\n \n\n \n\n20,716 \n\n \n\n \n\n \n\n19,269 \n\n \n\nSales and marketing\n\n \n\n \n\n21,825 \n\n \n\n \n\n \n\n20,117 \n\n \n\n \n\n \n\n19,598 \n\n \n\nGeneral and administrative\n\n \n\n \n\n5,900 \n\n \n\n \n\n \n\n5,107 \n\n \n\n \n\n \n\n5,111 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOperating income\n\n \n\n \n\n83,383 \n\n \n\n \n\n \n\n69,916 \n\n \n\n \n\n \n\n52,959 \n\n \n\nOther income, net \n\n \n\n \n\n \n\n \n\n \n\n1,186 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nIncome before income taxes\n\n \n\n \n\n83,716 \n\n \n\n \n\n \n\n71,102 \n\n \n\n \n\n \n\n53,036 \n\n \n\nProvision for income taxes\n\n \n\n \n\n10,978 \n\n \n\n \n\n \n\n9,831 \n\n \n\n \n\n \n\n8,755 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet income\n\n \n\n$\n\n72,738 \n\n \n\n \n\n$\n\n61,271 \n\n \n\n \n\n$\n\n44,281 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nEarnings per share:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBasic\n\n \n\n$\n\n9.70 \n\n \n\n \n\n$\n\n8.12 \n\n \n\n \n\n$\n\n5.82 \n\n \n\nDiluted\n\n \n\n$\n\n9.65 \n\n \n\n \n\n$\n\n8.05 \n\n \n\n \n\n$\n\n5.76 \n\n \n\n \n\n \n\n \n\n \n\nWeighted average shares outstanding:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBasic\n\n \n\n \n\n7,496 \n\n \n\n \n\n \n\n7,547 \n\n \n\n \n\n \n\n7,610 \n\n \n\nDiluted\n\n \n\n \n\n7,540 \n\n \n\n \n\n \n\n7,608 \n\n \n\n \n\n \n\n7,683 \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nRefer to accompanying notes. \n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nCOMPREHENSIVE INCOME STATEMENTS\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet income\n\n \n\n$\n\n72,738 \n\n \n\n \n\n$\n\n61,271 \n\n \n\n \n\n$\n\n44,281 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOther comprehensive income (loss), net of tax:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet change related to derivatives\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 38 \n\n)\n\nNet change related to investments\n\n \n\n \n\n( 5,360 \n\n)\n\n \n\n \n\n( 2,266 \n\n)\n\n \n\n \n\n3,990 \n\n \n\nTranslation adjustments and other\n\n \n\n \n\n( 1,146 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 426 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOther comprehensive income (loss)\n\n \n\n \n\n( 6,500 \n\n)\n\n \n\n \n\n( 1,374 \n\n)\n\n \n\n \n\n3,526 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nComprehensive income\n\n \n\n$\n\n66,238 \n\n \n\n \n\n$\n\n59,897 \n\n \n\n \n\n$\n\n47,807 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nRefer to accompanying notes. \n\n \n\n \n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nBALANCE SHEETS \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nAssets\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCurrent assets:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCash and cash equivalents\n\n \n\n$\n\n13,931 \n\n \n\n \n\n$\n\n14,224 \n\n \n\nShort-term investments\n\n \n\n \n\n90,826 \n\n \n\n \n\n \n\n116,110 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal cash, cash equivalents, and short-term investments\n\n \n\n \n\n104,757 \n\n \n\n \n\n \n\n130,334 \n\n \n\nAccounts receivable, net of allowance for doubtful accounts of $ 633 and $ 751 \n\n \n\n \n\n44,261 \n\n \n\n \n\n \n\n38,043 \n\n \n\nInventories\n\n \n\n \n\n3,742 \n\n \n\n \n\n \n\n2,636 \n\n \n\nOther current assets\n\n \n\n \n\n16,924 \n\n \n\n \n\n \n\n13,393 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal current assets\n\n \n\n \n\n169,684 \n\n \n\n \n\n \n\n184,406 \n\n \n\nProperty and equipment, net of accumulated depreciation of $ 59,660 and $ 51,351 \n\n \n\n \n\n74,398 \n\n \n\n \n\n \n\n59,715 \n\n \n\nOperating lease right-of-use assets\n\n \n\n \n\n13,148 \n\n \n\n \n\n \n\n11,088 \n\n \n\nEquity investments\n\n \n\n \n\n6,891 \n\n \n\n \n\n \n\n5,984 \n\n \n\nGoodwill\n\n \n\n \n\n67,524 \n\n \n\n \n\n \n\n49,711 \n\n \n\nIntangible assets, net\n\n \n\n \n\n11,298 \n\n \n\n \n\n \n\n7,800 \n\n \n\nOther long-term assets\n\n \n\n \n\n21,897 \n\n \n\n \n\n \n\n15,075 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal assets\n\n \n\n$\n\n364,840 \n\n \n\n \n\n$\n\n333,779 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nLiabilities and stockholders’ equity\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCurrent liabilities:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nAccounts payable\n\n \n\n$\n\n19,000 \n\n \n\n \n\n$\n\n15,163 \n\n \n\nCurrent portion of long-term debt\n\n \n\n \n\n2,749 \n\n \n\n \n\n \n\n8,072 \n\n \n\nAccrued compensation\n\n \n\n \n\n10,661 \n\n \n\n \n\n \n\n10,057 \n\n \n\nShort-term income taxes\n\n \n\n \n\n4,067 \n\n \n\n \n\n \n\n2,174 \n\n \n\nShort-term unearned revenue\n\n \n\n \n\n45,538 \n\n \n\n \n\n \n\n41,525 \n\n \n\nOther current liabilities\n\n \n\n \n\n13,067 \n\n \n\n \n\n \n\n11,666 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal current liabilities\n\n \n\n \n\n95,082 \n\n \n\n \n\n \n\n88,657 \n\n \n\nLong-term debt\n\n \n\n \n\n47,032 \n\n \n\n \n\n \n\n50,074 \n\n \n\nLong-term income taxes\n\n \n\n \n\n26,069 \n\n \n\n \n\n \n\n27,190 \n\n \n\nLong-term unearned revenue\n\n \n\n \n\n2,870 \n\n \n\n \n\n \n\n2,616 \n\n \n\nDeferred income taxes\n\n \n\n \n\n \n\n \n\n \n\n \n\nOperating lease liabilities\n\n \n\n \n\n11,489 \n\n \n\n \n\n \n\n9,629 \n\n \n\nOther long-term liabilities\n\n \n\n \n\n15,526 \n\n \n\n \n\n \n\n13,427 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal liabilities\n\n \n\n \n\n198,298 \n\n \n\n \n\n \n\n191,791 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCommitments and contingencies\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nStockholders’ equity:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCommon stock and paid-in capital – shares authorized 24,000 ; outstanding 7,464 and 7,519 \n\n \n\n \n\n86,939 \n\n \n\n \n\n \n\n83,111 \n\n \n\nRetained earnings\n\n \n\n \n\n84,281 \n\n \n\n \n\n \n\n57,055 \n\n \n\nAccumulated other comprehensive income (loss)\n\n \n\n \n\n( 4,678 \n\n)\n\n \n\n \n\n1,822 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal stockholders’ equity\n\n \n\n \n\n166,542 \n\n \n\n \n\n \n\n141,988 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal liabilities and stockholders’ equity\n\n \n\n$\n\n364,840 \n\n \n\n \n\n$\n\n333,779 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nRefer to accompanying notes. \n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nCASH FLOWS STATEMENTS\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOperations\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet income\n\n \n\n$\n\n72,738 \n\n \n\n \n\n$\n\n61,271 \n\n \n\n \n\n$\n\n44,281 \n\n \n\nAdjustments to reconcile net income to net cash from operations:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDepreciation, amortization, and other\n\n \n\n \n\n14,460 \n\n \n\n \n\n \n\n11,686 \n\n \n\n \n\n \n\n12,796 \n\n \n\nStock-based compensation expense\n\n \n\n \n\n7,502 \n\n \n\n \n\n \n\n6,118 \n\n \n\n \n\n \n\n5,289 \n\n \n\nNet recognized gains on investments and derivatives\n\n \n\n \n\n( 409 \n\n)\n\n \n\n \n\n( 1,249 \n\n)\n\n \n\n \n\n( 219 \n\n)\n\nDeferred income taxes\n\n \n\n \n\n( 5,702 \n\n)\n\n \n\n \n\n( 150 \n\n)\n\n \n\n \n\n \n\nChanges in operating assets and liabilities:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nAccounts receivable\n\n \n\n \n\n( 6,834 \n\n)\n\n \n\n \n\n( 6,481 \n\n)\n\n \n\n \n\n( 2,577 \n\n)\n\nInventories\n\n \n\n \n\n( 1,123 \n\n)\n\n \n\n \n\n( 737 \n\n)\n\n \n\n \n\n \n\nOther current assets\n\n \n\n \n\n( 709 \n\n)\n\n \n\n \n\n( 932 \n\n)\n\n \n\n \n\n( 2,330 \n\n)\n\nOther long-term assets\n\n \n\n \n\n( 2,805 \n\n)\n\n \n\n \n\n( 3,459 \n\n)\n\n \n\n \n\n( 1,037 \n\n)\n\nAccounts payable\n\n \n\n \n\n2,943 \n\n \n\n \n\n \n\n2,798 \n\n \n\n \n\n \n\n3,018 \n\n \n\nUnearned revenue\n\n \n\n \n\n5,109 \n\n \n\n \n\n \n\n4,633 \n\n \n\n \n\n \n\n2,212 \n\n \n\nIncome taxes\n\n \n\n \n\n \n\n \n\n \n\n( 2,309 \n\n)\n\n \n\n \n\n( 3,631 \n\n)\n\nOther current liabilities\n\n \n\n \n\n2,344 \n\n \n\n \n\n \n\n4,149 \n\n \n\n \n\n \n\n1,346 \n\n \n\nOther long-term liabilities\n\n \n\n \n\n \n\n \n\n \n\n1,402 \n\n \n\n \n\n \n\n1,348 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet cash from operations\n\n \n\n \n\n89,035 \n\n \n\n \n\n \n\n76,740 \n\n \n\n \n\n \n\n60,675 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nFinancing\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCash premium on debt exchange\n\n \n\n \n\n \n\n \n\n \n\n( 1,754 \n\n)\n\n \n\n \n\n( 3,417 \n\n)\n\nRepayments of debt\n\n \n\n \n\n( 9,023 \n\n)\n\n \n\n \n\n( 3,750 \n\n)\n\n \n\n \n\n( 5,518 \n\n)\n\nCommon stock issued\n\n \n\n \n\n1,841 \n\n \n\n \n\n \n\n1,693 \n\n \n\n \n\n \n\n1,343 \n\n \n\nCommon stock repurchased\n\n \n\n \n\n( 32,696 \n\n)\n\n \n\n \n\n( 27,385 \n\n)\n\n \n\n \n\n( 22,968 \n\n)\n\nCommon stock cash dividends paid\n\n \n\n \n\n( 18,135 \n\n)\n\n \n\n \n\n( 16,521 \n\n)\n\n \n\n \n\n( 15,137 \n\n)\n\nOther, net\n\n \n\n \n\n( 863 \n\n)\n\n \n\n \n\n( 769 \n\n)\n\n \n\n \n\n( 334 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet cash used in financing\n\n \n\n \n\n( 58,876 \n\n)\n\n \n\n \n\n( 48,486 \n\n)\n\n \n\n \n\n( 46,031 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nInvesting\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nAdditions to property and equipment\n\n \n\n \n\n( 23,886 \n\n)\n\n \n\n \n\n( 20,622 \n\n)\n\n \n\n \n\n( 15,441 \n\n)\n\nAcquisition of companies, net of cash acquired, and purchases of intangible and other assets\n\n \n\n \n\n( 22,038 \n\n)\n\n \n\n \n\n( 8,909 \n\n)\n\n \n\n \n\n( 2,521 \n\n)\n\nPurchases of investments\n\n \n\n \n\n( 26,456 \n\n)\n\n \n\n \n\n( 62,924 \n\n)\n\n \n\n \n\n( 77,190 \n\n)\n\nMaturities of investments\n\n \n\n \n\n16,451 \n\n \n\n \n\n \n\n51,792 \n\n \n\n \n\n \n\n66,449 \n\n \n\nSales of investments\n\n \n\n \n\n28,443 \n\n \n\n \n\n \n\n14,008 \n\n \n\n \n\n \n\n17,721 \n\n \n\nOther, net\n\n \n\n \n\n( 2,825 \n\n)\n\n \n\n \n\n( 922 \n\n)\n\n \n\n \n\n( 1,241 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet cash used in investing\n\n \n\n \n\n( 30,311 \n\n)\n\n \n\n \n\n( 27,577 \n\n)\n\n \n\n \n\n( 12,223 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nEffect of foreign exchange rates on cash and cash equivalents\n\n \n\n \n\n( 141 \n\n)\n\n \n\n \n\n( 29 \n\n)\n\n \n\n \n\n( 201 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet change in cash and cash equivalents\n\n \n\n \n\n( 293 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n2,220 \n\n \n\nCash and cash equivalents, beginning of period\n\n \n\n \n\n14,224 \n\n \n\n \n\n \n\n13,576 \n\n \n\n \n\n \n\n11,356 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCash and cash equivalents, end of period\n\n \n\n$\n\n13,931 \n\n \n\n \n\n$\n\n14,224 \n\n \n\n \n\n$\n\n13,576 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nRefer to accompanying notes.\n\nPART II \n\nItem 8\n\n \n\nSTOCKHOLDERS’ EQUITY STATEMENTS \n\n \n\n##TABLE_START (In millions, except per share amounts)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCommon stock and paid-in capital\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, beginning of period\n\n \n\n$\n\n83,111 \n\n \n\n \n\n$\n\n80,552 \n\n \n\n \n\n$\n\n78,520 \n\n \n\nCommon stock issued\n\n \n\n \n\n1,841 \n\n \n\n \n\n \n\n1,963 \n\n \n\n \n\n \n\n1,343 \n\n \n\nCommon stock repurchased\n\n \n\n \n\n( 5,688 \n\n)\n\n \n\n \n\n( 5,539 \n\n)\n\n \n\n \n\n( 4,599 \n\n)\n\nStock-based compensation expense\n\n \n\n \n\n7,502 \n\n \n\n \n\n \n\n6,118 \n\n \n\n \n\n \n\n5,289 \n\n \n\nOther, net\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 1 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, end of period\n\n \n\n \n\n86,939 \n\n \n\n \n\n \n\n83,111 \n\n \n\n \n\n \n\n80,552 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nRetained earnings\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, beginning of period\n\n \n\n \n\n57,055 \n\n \n\n \n\n \n\n34,566 \n\n \n\n \n\n \n\n24,150 \n\n \n\nNet income\n\n \n\n \n\n72,738 \n\n \n\n \n\n \n\n61,271 \n\n \n\n \n\n \n\n44,281 \n\n \n\nCommon stock cash dividends\n\n \n\n \n\n( 18,552 \n\n)\n\n \n\n \n\n( 16,871 \n\n)\n\n \n\n \n\n( 15,483 \n\n)\n\nCommon stock repurchased\n\n \n\n \n\n( 26,960 \n\n)\n\n \n\n \n\n( 21,879 \n\n)\n\n \n\n \n\n( 18,382 \n\n)\n\nCumulative effect of accounting changes\n\n \n\n \n\n \n\n \n\n \n\n( 32 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, end of period\n\n \n\n \n\n84,281 \n\n \n\n \n\n \n\n57,055 \n\n \n\n \n\n \n\n34,566 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nAccumulated other comprehensive income (loss)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, beginning of period\n\n \n\n \n\n1,822 \n\n \n\n \n\n \n\n3,186 \n\n \n\n \n\n \n\n( 340 \n\n)\n\nOther comprehensive income (loss)\n\n \n\n \n\n( 6,500 \n\n)\n\n \n\n \n\n( 1,374 \n\n)\n\n \n\n \n\n3,526 \n\n \n\nCumulative effect of accounting changes\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, end of period\n\n \n\n \n\n( 4,678 \n\n)\n\n \n\n \n\n1,822 \n\n \n\n \n\n \n\n3,186 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal stockholders’ equity\n\n \n\n$\n\n166,542 \n\n \n\n \n\n$\n\n141,988 \n\n \n\n \n\n$\n\n118,304 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCash dividends declared per common share\n\n \n\n$\n\n2.48 \n\n \n\n \n\n$\n\n2.24 \n\n \n\n \n\n$\n\n2.04 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nRefer to accompanying notes. \n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nNOTES TO FINANCIAL STATEMENTS \n\nNOTE 1 — ACCOUNTING POLICIES \n\nAccounting Principles \n\nOur consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).\n\nWe have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements. \n\nPrinciples of Consolidation \n\nThe consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. \n\nEstimates and Assumptions \n\nPreparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties.\n\nIn July 2022, we completed an assessment of the useful lives of our server and network equipment. Due to investments in software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, we determined we should increase the estimated useful lives of both server and network equipment from four years to six years . This change in accounting estimate will be effective beginning fiscal year 2023. We had previously increased the estimated useful lives of both server and network equipment in July 2020.\n\nForeign Currencies \n\nAssets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income. \n\nRevenue \n\nProduct Revenue and Service and Other Revenue \n\nProduct revenue includes sales from operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories. \n\nService and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.\n\nPART II \n\nItem 8\n\n \n\nRevenue Recognition \n\nRevenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. \n\nNature of Products and Services\n\nLicenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.\n\nCertain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time. \n\nCloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided. \n\nRevenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided. \n\nOur hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces. \n\nRefer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.\n\nSignificant Judgments\n\nOur contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.\n\nPART II \n\nItem 8\n\n \n\nJudgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. \n\nIn instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP. \n\nDue to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers. \n\nOur products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.\n\nContract Balances and Other Receivables \n\nTiming of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses. \n\nUnearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future, LinkedIn subscriptions, Office 365 subscriptions, Xbox subscriptions, Windows post-delivery support, Dynamics business solutions, and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. \n\nRefer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.\n\nPayment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.\n\nAs of June 30, 2022 and 2021, other receivables due from suppliers were $ 1.0 billion and $ 965 million, respectively, and are included in accounts receivable, net in our consolidated balance sheets.\n\nAs of June 30, 2022 and 2021, long-term accounts receivable, net of allowance for doubtful accounts, was $ 3.8 billion and $ 3.4 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.\n\nThe allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. \n\nPART II \n\nItem 8\n\n \n\nActivity in the allowance for doubtful accounts was as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, beginning of period\n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nCharged to costs and other\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nWrite-offs\n\n \n\n \n\n( 245 \n\n)\n\n \n\n \n\n( 252 \n\n)\n\n \n\n \n\n( 178 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, end of period\n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nAllowance for doubtful accounts included in our consolidated balance sheets:\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nAccounts receivable, net of allowance for doubtful accounts\n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nOther long-term assets\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n 816 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nWe record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2022 and 2021, our financing receivables, net were $ 4.1 billion and $ 4.4 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.\n\nAssets Recognized from Costs to Obtain a Contract with a Customer\n\nWe recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets. \n\nWe apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.\n\nCost of Revenue \n\nCost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products. \n\nProduct Warranty \n\nWe provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary. \n\nPART II \n\nItem 8\n\n \n\nResearch and Development \n\nResearch and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products. \n\nSales and Marketing \n\nSales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $ 1.5 billion, $ 1.5 billion, and $ 1.6 billion in fiscal years 2022, 2021, and 2020, respectively. \n\nStock-Based Compensation \n\nCompensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.\n\nCompensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.\n\nIncome Taxes \n\nIncome tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets. \n\nFinancial Instruments\n\nInvestments\n\nWe consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. \n\nPART II \n\nItem 8\n\n \n\nDebt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income . Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery , then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments. \n\nEquity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net. \n\nDerivatives\n\nDerivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. \n\nFor derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.\n\nFor derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net. \n\nFor derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.\n\nFair Value Measurements\n\nWe account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are: \n\n##TABLE_START \n\n• \n\nLevel 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges. \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nLevel 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities include certain over-the-counter forward, option, and swap contracts. \n\n##TABLE_END\n\nPART II \n\nItem 8\n\n \n\n##TABLE_START \n\n• \n\nLevel 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds , municipal securities , and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. \n\n##TABLE_END\n\nWe measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. \n\nOur other current financial assets and current financial liabilities have fair values that approximate their carrying values.\n\nInventories \n\nInventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue. \n\nProperty and Equipment \n\nProperty and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three to seven years ; computer equipment, two to four years ; buildings and improvements, five to 15 years ; leasehold improvements, three to 20 years ; and furniture and equipment, one to 10 years . Land is not depreciated. \n\nLeases\n\nWe determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets. \n\nROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. \n\nWe have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities. \n\nGoodwill \n\nGoodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. \n\nPART II \n\nItem 8\n\n \n\nIntangible Assets \n\nOur intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 20 years . We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. \n\nRecent Accounting Guidance \n\nAccounting for Income Taxes\n\nIn December 2019, the Financial Accounting Standards Board issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. We adopted the standard effective July 1, 2021. Adoption of the standard did not have a material impact on our consolidated financial statements.\n\nNOTE 2 — EARNINGS PER SHARE \n\nBasic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards. \n\nThe components of basic and diluted EPS were as follows: \n\n \n\n##TABLE_START (In millions, except earnings per share)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet income available for common shareholders (A)\n\n \n\n$\n\n72,738 \n\n \n\n \n\n$\n\n61,271 \n\n \n\n \n\n$\n\n 44,281 \n\n \n\nWeighted average outstanding shares of common stock (B)\n\n \n\n \n\n7,496 \n\n \n\n \n\n \n\n7,547 \n\n \n\n \n\n \n\n7,610 \n\n \n\nDilutive effect of stock-based awards\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCommon stock and common stock equivalents (C)\n\n \n\n \n\n7,540 \n\n \n\n \n\n \n\n7,608 \n\n \n\n \n\n \n\n7,683 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nEarnings Per Share\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBasic (A/B)\n\n \n\n$\n\n9.70 \n\n \n\n \n\n$\n\n8.12 \n\n \n\n \n\n$\n\n5.82 \n\n \n\nDiluted (A/C)\n\n \n\n$\n\n9.65 \n\n \n\n \n\n$\n\n8.05 \n\n \n\n \n\n$\n\n5.76 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nAnti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.\n\nNOTE 3 — OTHER INCOME (EXPENSE), NET \n\nThe components of other income (expense), net were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nInterest and dividends income\n\n \n\n$\n\n2,094 \n\n \n\n \n\n$\n\n2,131 \n\n \n\n \n\n$\n\n2,680 \n\n \n\nInterest expense\n\n \n\n \n\n( 2,063 \n\n)\n\n \n\n \n\n( 2,346 \n\n)\n\n \n\n \n\n ( 2,591 \n\n)\n\nNet recognized gains on investments\n\n \n\n \n\n \n\n \n\n \n\n1,232 \n\n \n\n \n\n \n\n \n\nNet gains (losses) on derivatives\n\n \n\n \n\n( 52 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\nNet gains (losses) on foreign currency remeasurements\n\n \n\n \n\n( 75 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 191 \n\n)\n\nOther, net\n\n \n\n \n\n( 32 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 40 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n \n\n \n\n$\n\n1,186 \n\n \n\n \n\n$\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\nPART II \n\nItem 8\n\n \n\n \n\n \n\nNet Recognized Gains (Losses) on Investments \n\nNet recognized gains (losses) on debt investments were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nRealized gains from sales of available-for-sale securities\n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nRealized losses from sales of available-for-sale securities\n\n \n\n \n\n( 138 \n\n)\n\n \n\n \n\n( 40 \n\n)\n\n \n\n \n\n( 37 \n\n) \n\nImpairments and allowance for credit losses\n\n \n\n \n\n( 81 \n\n)\n\n \n\n \n\n( 2 \n\n)\n\n \n\n \n\n( 17 \n\n) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n( 57 \n\n)\n\n \n\n$\n\n \n\n \n\n$\n\n( 4 \n\n) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nNet recognized gains (losses) on equity investments were as follows:\n\n \n\n##TABLE_START (In millions) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet realized gains on investments sold\n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nNet unrealized gains on investments still held\n\n \n\n \n\n \n\n \n\n \n\n1,057 \n\n \n\n \n\n \n\n 69 \n\n \n\nImpairments of investments\n\n \n\n \n\n( 20 \n\n)\n\n \n\n \n\n( 11 \n\n)\n\n \n\n \n\n( 116 \n\n) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n \n\n \n\n$\n\n1,169 \n\n \n\n \n\n$\n\n 36 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nNOTE 4 — INVESTMENTS \n\nInvestment Components \n\nThe components of investments were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\nFair Value\n\nLevel\n\n \n\n \n\nAdjusted\n\nCost Basis\n\n \n\n \n\nUnrealized\n\nGains\n\n \n\n \n\nUnrealized\n\nLosses\n\n \n\n \n\nRecorded\n\nBasis\n\n \n\n \n\nCash\n\nand Cash\n\nEquivalents\n\n \n\nShort-term\n\nInvestments\n\n \n\n \n\nEquity\n\nInvestments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30, 2022\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nChanges in Fair Value Recorded in Other Comprehensive Income\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCommercial paper\n\n \n\n \n\nLevel 2\n\n \n\n \n\n$\n\n2,500 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n2,500 \n\n \n\n \n\n$\n\n2,498 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nCertificates of deposit\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n2,071 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n2,071 \n\n \n\n \n\n \n\n2,032 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nU.S. government securities\n\n \n\n \n\nLevel 1\n\n \n\n \n\n \n\n79,696 \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 2,178 \n\n)\n\n \n\n \n\n77,547 \n\n \n\n \n\n \n\n \n\n \n\n \n\n77,538 \n\n \n\n \n\n \n\n \n\nU.S. agency securities\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 9 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nForeign government bonds\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 24 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nMortgage- and asset-backed securities\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 30 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCorporate notes and bonds\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n11,661 \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 554 \n\n)\n\n \n\n \n\n11,111 \n\n \n\n \n\n \n\n \n\n \n\n \n\n11,111 \n\n \n\n \n\n \n\n \n\nCorporate notes and bonds\n\n \n\n \n\nLevel 3\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nMunicipal securities\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 13 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nMunicipal securities\n\n \n\n \n\nLevel 3\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 6 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal debt investments\n\n \n\n \n\n \n\n \n\n \n\n$\n\n98,118 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n( 2,814 \n\n)\n\n \n\n$\n\n95,357 \n\n \n\n \n\n$\n\n4,539 \n\n \n\n \n\n$\n\n90,818 \n\n \n\n \n\n$\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nChanges in Fair Value Recorded in Net Income\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nEquity investments\n\n \n\n \n\nLevel 1\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n1,590 \n\n \n\n \n\n$\n\n1,134 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nEquity investments\n\n \n\n \n\nOther\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n6,435 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n6,435 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal equity investments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n8,025 \n\n \n\n \n\n$\n\n1,134 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n6,891 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCash\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n8,258 \n\n \n\n \n\n$\n\n8,258 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nDerivatives, net (a) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n111,648 \n\n \n\n \n\n$\n\n13,931 \n\n \n\n \n\n$\n\n90,826 \n\n \n\n \n\n$\n\n6,891 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\nPART II \n\nItem 8\n\n \n\n \n\n \n\n##TABLE_START (In millions)\n\n \n\nFair Value\n\nLevel\n\n \n\n \n\nAdjusted\n\nCost Basis\n\n \n\n \n\nUnrealized\n\nGains\n\n \n\n \n\nUnrealized\n\nLosses\n\n \n\n \n\nRecorded\n\nBasis\n\n \n\n \n\nCash\n\nand Cash\n\nEquivalents\n\n \n\nShort-term\n\nInvestments\n\n \n\n \n\nEquity\n\nInvestments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30, 2021\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nChanges in Fair Value Recorded in Other Comprehensive Income\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCommercial paper\n\n \n\n \n\nLevel 2\n\n \n\n \n\n$\n\n4,316 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n4,316 \n\n \n\n \n\n$\n\n1,331 \n\n \n\n \n\n$\n\n2,985 \n\n \n\n \n\n$\n\n \n\nCertificates of deposit\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n3,615 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n3,615 \n\n \n\n \n\n \n\n2,920 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nU.S. government securities\n\n \n\n \n\nLevel 1\n\n \n\n \n\n \n\n90,664 \n\n \n\n \n\n \n\n3,832 \n\n \n\n \n\n \n\n( 111 \n\n)\n\n \n\n \n\n94,385 \n\n \n\n \n\n \n\n1,500 \n\n \n\n \n\n \n\n92,885 \n\n \n\n \n\n \n\n \n\nU.S. agency securities\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nForeign government bonds\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n6,213 \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 2 \n\n)\n\n \n\n \n\n6,220 \n\n \n\n \n\n \n\n \n\n \n\n \n\n5,995 \n\n \n\n \n\n \n\n \n\nMortgage- and asset-backed securities\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n3,442 \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 6 \n\n)\n\n \n\n \n\n3,458 \n\n \n\n \n\n \n\n \n\n \n\n \n\n3,458 \n\n \n\n \n\n \n\n \n\nCorporate notes and bonds\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n8,443 \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 9 \n\n)\n\n \n\n \n\n8,683 \n\n \n\n \n\n \n\n \n\n \n\n \n\n8,683 \n\n \n\n \n\n \n\n \n\nCorporate notes and bonds\n\n \n\n \n\nLevel 3\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nMunicipal securities\n\n \n\n \n\nLevel 2\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nMunicipal securities\n\n \n\n \n\nLevel 3\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 7 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal debt investments\n\n \n\n \n\n \n\n \n\n \n\n$\n\n117,966 \n\n \n\n \n\n$\n\n4,177 \n\n \n\n \n\n$\n\n( 135 \n\n)\n\n \n\n$\n\n122,008 \n\n \n\n \n\n$\n\n5,976 \n\n \n\n \n\n$\n\n116,032 \n\n \n\n \n\n$\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nChanges in Fair Value Recorded in Net Income\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nEquity investments\n\n \n\n \n\nLevel 1\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n1,582 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nEquity investments\n\n \n\n \n\nOther\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n5,378 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n5,378 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal equity investments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n6,960 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n5,984 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCash\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n7,272 \n\n \n\n \n\n$\n\n7,272 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nDerivatives, net (a) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n136,318 \n\n \n\n \n\n$\n\n14,224 \n\n \n\n \n\n$\n\n116,110 \n\n \n\n \n\n$\n\n5,984 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\n##TABLE_START (a) \n\nRefer to Note 5 – Derivatives for further information on the fair value of our derivative instruments. \n\n##TABLE_END\n\n \n\nEquity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2022 and 2021, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $ 3.8 billion and $ 3.3 billion, respectively. \n\nUnrealized Losses on Debt Investments \n\nDebt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows: \n\n \n\n##TABLE_START \n\n \n\nLess than 12 Months\n\n \n\n \n\n12 Months or Greater\n\n \n\n \n\n \n\n \n\n \n\nTotal Unrealized Losses\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n(In millions)\n\n \n\nFair Value\n\n \n\n \n\nUnrealized Losses\n\n \n\n \n\nFair Value\n\n \n\n \n\nUnrealized Losses\n\n \n\n \n\nTotal Fair Value\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30, 2022\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nU.S. government and agency securities\n\n \n\n$\n\n59,092 \n\n \n\n \n\n$\n\n( 1,835 \n\n)\n\n \n\n$\n\n2,210 \n\n \n\n \n\n$\n\n( 352 \n\n)\n\n \n\n$\n\n61,302 \n\n \n\n \n\n$\n\n( 2,187 \n\n)\n\nForeign government bonds\n\n \n\n \n\n \n\n \n\n \n\n( 18 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 6 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 24 \n\n)\n\nMortgage- and asset-backed securities\n\n \n\n \n\n \n\n \n\n \n\n( 26 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 4 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 30 \n\n)\n\nCorporate notes and bonds\n\n \n\n \n\n9,443 \n\n \n\n \n\n \n\n( 477 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 77 \n\n)\n\n \n\n \n\n10,229 \n\n \n\n \n\n \n\n( 554 \n\n)\n\nMunicipal securities\n\n \n\n \n\n \n\n \n\n \n\n( 12 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 7 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 19 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n69,641 \n\n \n\n \n\n$\n\n( 2,368 \n\n)\n\n \n\n$\n\n3,138 \n\n \n\n \n\n$\n\n( 446 \n\n)\n\n \n\n$\n\n72,779 \n\n \n\n \n\n$\n\n( 2,814 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\nPART II \n\nItem 8\n\n \n\n \n\n \n\n##TABLE_START \n\n \n\nLess than 12 Months\n\n \n\n \n\n12 Months or Greater\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal Unrealized Losses\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n(In millions)\n\n \n\n \n\nFair Value\n\n \n\n \n\n \n\nUnrealized Losses\n\n \n\n \n\n \n\nFair Value\n\n \n\n \n\n \n\nUnrealized Losses\n\n \n\n \n\n \n\nTotal Fair Value\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30, 2021\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nU.S. government and agency securities\n\n \n\n$\n\n5,294 \n\n \n\n \n\n$\n\n( 111 \n\n)\n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n5,294 \n\n \n\n \n\n$\n\n( 111 \n\n)\n\nForeign government bonds\n\n \n\n \n\n3,148 \n\n \n\n \n\n \n\n( 1 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 1 \n\n)\n\n \n\n \n\n3,153 \n\n \n\n \n\n \n\n( 2 \n\n)\n\nMortgage- and asset-backed securities\n\n \n\n \n\n1,211 \n\n \n\n \n\n \n\n( 5 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 1 \n\n)\n\n \n\n \n\n1,298 \n\n \n\n \n\n \n\n( 6 \n\n)\n\nCorporate notes and bonds\n\n \n\n \n\n1,678 \n\n \n\n \n\n \n\n( 8 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 1 \n\n)\n\n \n\n \n\n1,712 \n\n \n\n \n\n \n\n( 9 \n\n)\n\nMunicipal securities\n\n \n\n \n\n \n\n \n\n \n\n( 7 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 7 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n11,389 \n\n \n\n \n\n$\n\n( 132 \n\n)\n\n \n\n$\n\n \n\n \n\n$\n\n( 3 \n\n)\n\n \n\n$\n\n11,516 \n\n \n\n \n\n$\n\n( 135 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nUnrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence. \n\nDebt Investment Maturities \n\n \n\n##TABLE_START (In millions)\n\n \n\nAdjusted\n\nCost Basis\n\n \n\n \n\nEstimated\n\nFair Value\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30, 2022\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDue in one year or less\n\n \n\n$\n\n26,480 \n\n \n\n \n\n$\n\n26,470 \n\n \n\nDue after one year through five years\n\n \n\n \n\n52,006 \n\n \n\n \n\n \n\n50,748 \n\n \n\nDue after five years through 10 years\n\n \n\n \n\n18,274 \n\n \n\n \n\n \n\n16,880 \n\n \n\nDue after 10 years\n\n \n\n \n\n1,358 \n\n \n\n \n\n \n\n1,259 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n98,118 \n\n \n\n \n\n$\n\n95,357 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nNOTE 5 — DERIVATIVES \n\nWe use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment. \n\nForeign Currencies \n\nCertain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. \n\nForeign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.\n\nCertain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures. \n\nInterest Rate \n\nInterest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.\n\nPART II \n\nItem 8\n\n \n\nSecurities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option contracts . These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below. \n\nEquity \n\nSecurities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.\n\nCredit \n\nOur fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.\n\nCredit-Risk-Related Contingent Features \n\nCertain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $ 1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2022, our long-term unsecured debt rating was AAA , and cash investments were in excess of $ 1.0 billion. As a result, no collateral was required to be posted. \n\nThe following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:\n\n \n\n##TABLE_START (In millions)\n\n \n\nJune 30,\n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDesignated as Hedging Instruments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nForeign exchange contracts purchased\n\n \n\n$\n\n \n\n \n\n$\n\n \n\nForeign exchange contracts sold\n\n \n\n \n\n \n\n \n\n \n\n6,081 \n\n \n\nInterest rate contracts purchased\n\n \n\n \n\n1,139 \n\n \n\n \n\n \n\n1,247 \n\n \n\n \n\n \n\n \n\nNot Designated as Hedging Instruments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nForeign exchange contracts purchased\n\n \n\n \n\n10,322 \n\n \n\n \n\n \n\n14,223 \n\n \n\nForeign exchange contracts sold\n\n \n\n \n\n21,606 \n\n \n\n \n\n \n\n23,391 \n\n \n\nOther contracts purchased\n\n \n\n \n\n2,773 \n\n \n\n \n\n \n\n2,456 \n\n \n\nOther contracts sold\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nFair Values of Derivative Instruments \n\nThe following table presents our derivative instruments: \n\n \n\n##TABLE_START \n\n \n\nDerivative\n\n \n\nDerivative\n\n \n\nDerivative\n\n \n\nDerivative\n\n \n\n(In millions)\n\n \n\nAssets\n\n \n\nLiabilities\n\n \n\nAssets\n\n \n\nLiabilities\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30,\n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDesignated as Hedging Instruments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nForeign exchange contracts\n\n \n\n$\n\n \n\n \n\n$\n\n( 77 \n\n)\n\n \n\n$\n\n \n\n \n\n$\n\n( 8 \n\n)\n\nInterest rate contracts\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNot Designated as Hedging Instruments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nForeign exchange contracts\n\n \n\n \n\n \n\n \n\n \n\n( 362 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 291 \n\n)\n\nOther contracts\n\n \n\n \n\n \n\n \n\n \n\n( 112 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 36 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nGross amounts of derivatives\n\n \n\n \n\n \n\n \n\n \n\n( 551 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 335 \n\n)\n\nGross amounts of derivatives offset in the balance sheet\n\n \n\n \n\n( 130 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 141 \n\n)\n\n \n\n \n\n \n\nCash collateral received\n\n \n\n \n\n 0 \n\n \n\n \n\n \n\n( 75 \n\n)\n\n \n\n \n\n 0 \n\n \n\n \n\n \n\n( 42 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet amounts of derivatives\n\n \n\n$\n\n \n\n \n\n$\n\n( 493 \n\n)\n\n \n\n$\n\n \n\n \n\n$\n\n( 235 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nReported as\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nShort-term investments\n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nOther current assets\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOther long-term assets\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOther current liabilities\n\n \n\n \n\n \n\n \n\n \n\n( 298 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 182 \n\n)\n\nOther long-term liabilities\n\n \n\n \n\n \n\n \n\n \n\n( 195 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 53 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n \n\n \n\n$\n\n( 493 \n\n)\n\n \n\n$\n\n \n\n \n\n$\n\n( 235 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\nGross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $ 343 million and $ 550 million, respectively, as of June 30, 2022, and $ 395 million and $ 335 million, respectively, as of June 30, 2021. \n\nThe following table presents the fair value of our derivatives instruments on a gross basis:\n\n \n\n##TABLE_START (In millions)\n\n \n\nLevel 1 \n\n \n\n \n\n \n\nLevel 2 \n\n \n\n \n\nLevel 3 \n\n \n\n \n\nTotal\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30, 2022\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDerivative assets\n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nDerivative liabilities\n\n \n\n \n\n \n\n \n\n \n\n( 551 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 551 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30, 2021\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDerivative assets\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDerivative liabilities\n\n \n\n \n\n \n\n \n\n \n\n( 335 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 335 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nGains (losses) on derivative instruments recognized in other income (expense), net were as follows:\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDesignated as Fair Value Hedging Instruments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nForeign exchange contracts\n\n \n\n \n\n \n\nDerivatives\n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nHedged items\n\n \n\n \n\n( 50 \n\n)\n\n \n\n \n\n( 188 \n\n)\n\n \n\n \n\n \n\nExcluded from effectiveness assessment\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nInterest rate contracts\n\n \n\n \n\n \n\nDerivatives\n\n \n\n \n\n( 92 \n\n)\n\n \n\n \n\n( 37 \n\n)\n\n \n\n \n\n \n\nHedged items\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 93 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDesignated as Cash Flow Hedging Instruments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nForeign exchange contracts\n\n \n\n \n\n \n\nAmount reclassified from accumulated other comprehensive income\n\n \n\n \n\n( 79 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNot Designated as Hedging Instruments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nForeign exchange contracts\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 123 \n\n)\n\nOther contracts\n\n \n\n \n\n( 72 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nGains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDesignated as Cash Flow Hedging Instruments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nForeign exchange contracts\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nIncluded in effectiveness assessment\n\n \n\n$\n\n( 57 \n\n)\n\n \n\n$\n\n \n\n \n\n$\n\n( 38 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nNOTE 6 — INVENTORIES \n\nThe components of inventories were as follows:\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nRaw materials\n\n \n\n$\n\n1,144 \n\n \n\n \n\n$\n\n1,190 \n\n \n\nWork in process\n\n \n\n \n\n \n\n \n\n \n\n \n\nFinished goods\n\n \n\n \n\n2,516 \n\n \n\n \n\n \n\n1,367 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n3,742 \n\n \n\n \n\n$\n\n2,636 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nNOTE 7 — PROPERTY AND EQUIPMENT \n\nThe components of property and equipment were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nLand\n\n \n\n$\n\n4,734 \n\n \n\n \n\n$\n\n3,660 \n\n \n\nBuildings and improvements\n\n \n\n \n\n55,014 \n\n \n\n \n\n \n\n43,928 \n\n \n\nLeasehold improvements\n\n \n\n \n\n7,819 \n\n \n\n \n\n \n\n6,884 \n\n \n\nComputer equipment and software\n\n \n\n \n\n60,631 \n\n \n\n \n\n \n\n51,250 \n\n \n\nFurniture and equipment\n\n \n\n \n\n5,860 \n\n \n\n \n\n \n\n5,344 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal, at cost\n\n \n\n \n\n134,058 \n\n \n\n \n\n \n\n111,066 \n\n \n\nAccumulated depreciation\n\n \n\n \n\n( 59,660 \n\n)\n\n \n\n \n\n( 51,351 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal, net\n\n \n\n$\n\n 74,398 \n\n \n\n \n\n$\n\n 59,715 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nDuring fiscal years 2022, 2021, and 2020, depreciation expense was $ 12.6 billion, $ 9.3 billion, and $ 10.7 billion, respectively. We have committed $ 8.5 billion, primarily related to datacenters, for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2022. \n\nNOTE 8 — BUSINESS COMBINATIONS \n\nNuance Communications, Inc. \n\nOn March 4, 2022 , we completed our acquisition of Nuance Communications, Inc. (“Nuance”) for a total purchase price of $ 18.8 billion, consisting primarily of cash. Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. The financial results of Nuance have been included in our consolidated financial statements since the date of the acquisition. Nuance is reported as part of our Intelligent Cloud segment.\n\nThe purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.\n\nThe major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:\n\n \n\n##TABLE_START (In millions) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nGoodwill (a) \n\n \n\n \n\n$ \n\n16,308 \n\n \n\nIntangible assets\n\n \n\n \n\n \n\n4,365 \n\n \n\nOther assets\n\n \n\n \n\n \n\n \n\nOther liabilities (b) \n\n \n\n \n\n \n\n( 1,971 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal \n\n \n\n \n\n$\n\n18,761 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\n##TABLE_START (a) \n\nGoodwill was assigned to our Intelligent Cloud segment and was primarily attributed to increased synergies that are expected to be achieved from the integration of Nuance. None of the goodwill is expected to be deductible for income tax purposes. \n\n##TABLE_END\n\n##TABLE_START (b) \n\nIncludes $ 986 million of convertible senior notes issued by Nuance in 2015 and 2017, of which $ 985 million was redeemed prior to June 30, 2022. The remaining $ 1 million of notes are redeemable through their respective maturity dates and are included in other current liabilities on our consolidated balance sheets as of June 30, 2022. \n\n##TABLE_END\n\nPART II \n\nItem 8\n\n \n\nFollowing are the details of the purchase price allocated to the intangible assets acquired:\n\n \n\n##TABLE_START (In millions, except average life)\n\n \n\nAmount\n\n \n\n \n\nWeighted\n\nAverage Life\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCustomer-related\n\n \n\n$\n\n2,610 \n\n \n\n \n\n9 years\n\n \n\nTechnology-based\n\n \n\n \n\n1,540 \n\n \n\n \n\n5 years\n\n \n\nMarketing-related\n\n \n\n \n\n \n\n \n\n4 years\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n4,365 \n\n \n\n \n\n7 years\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nZeniMax Media Inc.\n\nOn March 9, 2021 , we completed our acquisition of ZeniMax Media Inc. (“ZeniMax”), the parent company of Bethesda Softworks LLC (“Bethesda”), for a total purchase price of $ 8.1 billion, consisting primarily of cash. The purchase price included $ 766 million of cash and cash equivalents acquired. Bethesda is one of the largest, privately held game developers and publishers in the world, and brings a broad portfolio of games, technology, and talent to Xbox. The financial results of ZeniMax have been included in our consolidated financial statements since the date of the acquisition. ZeniMax is reported as part of our More Personal Computing segment.\n\nThe allocation of the purchase price to goodwill was completed as of December 31, 2021. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:\n\n \n\n##TABLE_START (In millions) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCash and cash equivalents\n\n \n\n \n\n$\n\n \n\nGoodwill \n\n \n\n \n\n \n\n5,510 \n\n \n\nIntangible assets\n\n \n\n \n\n \n\n1,968 \n\n \n\nOther assets\n\n \n\n \n\n \n\n \n\nOther liabilities\n\n \n\n \n\n \n\n( 244 \n\n) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal \n\n \n\n \n\n$\n\n8,121 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nGoodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of ZeniMax. None of the goodwill is expected to be deductible for income tax purposes.\n\nFollowing are details of the purchase price allocated to the intangible assets acquired:\n\n \n\n##TABLE_START (In millions, except average life)\n\n \n\nAmount\n\n \n\n \n\nWeighted\n\nAverage Life\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTechnology-based\n\n \n\n$\n\n1,341 \n\n \n\n \n\n4 years\n\n \n\nMarketing-related\n\n \n\n \n\n \n\n \n\n11 years\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n1,968 \n\n \n\n \n\n6 years\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nActivision Blizzard, Inc.\n\nOn January 18, 2022 , we entered into a definitive agreement to acquire Activision Blizzard , Inc. (“Activision Blizzard ”) for $ 95.00 per share in an all-cash transaction valued at $ 68.7 billion, inclusive of Activision Blizzard’s net cash. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud and will provide building blocks for the metaverse. The acquisition has been approved by Activision Blizzard’s shareholders, and we expect it to close in fiscal year 202 3 , subject to the satisfaction of certain regulatory approvals and other customary closing conditions.\n\nPART II \n\nItem 8\n\n \n\nNOTE 9 — GOODWILL \n\nChanges in the carrying amount of goodwill were as follows:\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\nAcquisitions\n\n \n\n \n\n \n\nOther\n\n \n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\nAcquisitions\n\n \n\n \n\n \n\nOther\n\n \n\n \n\n \n\n \n\nJune 30, 2022\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nProductivity and Business Processes\n\n \n\n$\n\n24,190 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n24,317 \n\n \n\n \n\n$\n\n \n\n \n\n$\n\n( 105 \n\n)\n\n \n\n \n\n$\n\n24,811 \n\n \n\nIntelligent Cloud\n\n \n\n \n\n12,697 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n13,256 \n\n \n\n \n\n \n\n16,879 \n\n(b) \n\n \n\n \n\n \n\n(b) \n\n \n\n \n\n30,182 \n\n \n\nMore Personal Computing\n\n \n\n \n\n6,464 \n\n \n\n \n\n \n\n5,556 \n\n(a) \n\n \n\n \n\n(a) \n\n \n\n \n\n12,138 \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 255 \n\n)\n\n \n\n \n\n \n\n12,531 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n43,351 \n\n \n\n \n\n$\n\n6,061 \n\n \n\n \n\n$\n\n299 \n\n \n\n \n\n$\n\n49,711 \n\n \n\n \n\n$\n\n18,126 \n\n \n\n \n\n$\n\n( 313 \n\n)\n\n \n\n \n\n$\n\n67,524 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\n##TABLE_START (a) \n\nIncludes goodwill of $ 5.5 billion related to ZeniMax. See Note 8 – Business Combinations for further information . \n\n##TABLE_END\n\n##TABLE_START (b) \n\nIncludes goodwill of $ 16.3 billion related to Nuance. See Note 8 – Business Combinations for further information. \n\n##TABLE_END\n\nThe measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined. \n\nAny change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable. \n\nGoodwill Impairment\n\nWe test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses. \n\nNo instances of impairment were identified in our May 1, 2022, May 1, 2021, or May 1, 2020 tests. As of June 30, 2022 and 2021, accumulated goodwill impairment was $ 11.3 billion.\n\nNOTE 10 — INTANGIBLE ASSETS \n\nThe components of intangible assets, all of which are finite-lived, were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\nGross Carrying Amount\n\n \n\n \n\nAccumulated Amortization\n\n \n\n \n\nNet Carrying Amount\n\n \n\n \n\nGross Carrying Amount\n\n \n\n \n\nAccumulated Amortization\n\n \n\n \n\nNet Carrying Amount\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTechnology-based\n\n \n\n$\n\n11,277 \n\n \n\n \n\n$\n\n( 6,958 \n\n)\n\n \n\n$\n\n4,319 \n\n \n\n \n\n$\n\n9,779 \n\n \n\n \n\n$\n\n( 7,007 \n\n)\n\n \n\n$\n\n2,772 \n\n \n\nCustomer-related\n\n \n\n \n\n7,342 \n\n \n\n \n\n \n\n( 3,171 \n\n)\n\n \n\n \n\n4,171 \n\n \n\n \n\n \n\n4,958 \n\n \n\n \n\n \n\n( 2,859 \n\n)\n\n \n\n \n\n2,099 \n\n \n\nMarketing-related\n\n \n\n \n\n4,942 \n\n \n\n \n\n \n\n( 2,143 \n\n)\n\n \n\n \n\n2,799 \n\n \n\n \n\n \n\n4,792 \n\n \n\n \n\n \n\n( 1,878 \n\n)\n\n \n\n \n\n2,914 \n\n \n\nContract-based\n\n \n\n \n\n \n\n \n\n \n\n( 7 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 431 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n23,577 \n\n(a) \n\n \n\n$\n\n( 12,279 \n\n)\n\n \n\n$\n\n11,298 \n\n \n\n \n\n$\n\n19,975 \n\n(b) \n\n \n\n$\n\n( 12,175 \n\n)\n\n \n\n$\n\n7,800 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\n##TABLE_START (a) \n\nIncludes intangible assets of $ 4.4 billion related to Nuance. See Note 8 – Business Combinations for further information. \n\n##TABLE_END\n\n##TABLE_START (b) \n\nIncludes intangible assets of $ 2.0 billion related to ZeniMax. See Note 8 – Business Combinations for further information . \n\n##TABLE_END\n\nNo material impairments of intangible assets were identified during fiscal years 2022, 2021, or 2020. We estimate that we have no significant residual value related to our intangible assets.\n\nPART II \n\nItem 8\n\n \n\nThe components of intangible assets acquired during the periods presented were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\nAmount\n\n \n\n \n\nWeighted\n\nAverage Life\n\n \n\n \n\nAmount\n\n \n\n \n\nWeighted\n\nAverage Life\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTechnology-based\n\n \n\n$\n\n2,611 \n\n \n\n \n\n \n\n4 years\n\n \n\n \n\n$\n\n1,628 \n\n \n\n \n\n \n\n4 years\n\n \n\nCustomer-related\n\n \n\n \n\n2,837 \n\n \n\n \n\n \n\n9 years\n\n \n\n \n\n \n\n \n\n \n\n \n\n4 years\n\n \n\nMarketing-related\n\n \n\n \n\n \n\n \n\n \n\n4 years\n\n \n\n \n\n \n\n \n\n \n\n \n\n6 years\n\n \n\nContract-based\n\n \n\n \n\n \n\n \n\n \n\n0 years\n\n \n\n \n\n \n\n \n\n \n\n \n\n3 years\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n5,681 \n\n \n\n \n\n \n\n7 years\n\n \n\n \n\n$\n\n 2,359 \n\n \n\n \n\n \n\n5 years\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nIntangible assets amortization expense was $ 2.0 billion, $ 1.6 billion, and $ 1.6 billion for fiscal years 2022, 2021, and 2020, respectively. \n\nThe following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2022:\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ending June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n2,654 \n\n \n\n \n\n \n\n2,385 \n\n \n\n \n\n \n\n1,631 \n\n \n\n \n\n \n\n1,227 \n\n \n\n \n\n \n\n \n\nThereafter\n\n \n\n \n\n2,592 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n11,298 \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nNOTE 11 — DEBT \n\nThe components of debt were as follows: \n\n \n\n##TABLE_START (In millions, issuance by calendar year)\n\n \n\nMaturities\n\n(calendar year)\n\n \n\nStated Interest\n\nRate\n\n \n\n \n\nEffective Interest\n\nRate\n\n \n\nJune 30,\n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n2009 issuance of $ 3.8 billion (a) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n5.20 %\n\n \n\n \n\n \n\n \n\n5.24 %\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\n2010 issuance of $ 4.8 billion (a) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n4.50 %\n\n \n\n \n\n \n\n \n\n4.57 %\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n2011 issuance of $ 2.3 billion (a) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n5.30 %\n\n \n\n \n\n \n\n \n\n5.36 %\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n2012 issuance of $ 2.3 billion (a) \n\n \n\n \n\n–\n\n \n\n \n\n2.13 %\n\n–\n\n3.50 %\n\n \n\n \n\n2.24 %\n\n–\n\n3.57 %\n\n \n\n \n\n \n\n1,204 \n\n \n\n \n\n \n\n1,204 \n\n \n\n2013 issuance of $ 5.2 billion (a) \n\n \n\n \n\n–\n\n \n\n \n\n2.38 %\n\n–\n\n4.88 %\n\n \n\n \n\n2.47 %\n\n–\n\n4.92 %\n\n \n\n \n\n \n\n2,814 \n\n \n\n \n\n \n\n2,814 \n\n \n\n2013 issuance of € 4.1 billion\n\n \n\n \n\n–\n\n \n\n \n\n2.63 %\n\n–\n\n3.13 %\n\n \n\n \n\n2.69 %\n\n–\n\n3.22 %\n\n \n\n \n\n \n\n2,404 \n\n \n\n \n\n \n\n4,803 \n\n \n\n2015 issuance of $ 23.8 billion (a) \n\n \n\n \n\n–\n\n \n\n \n\n2.65 %\n\n–\n\n4.75 %\n\n \n\n \n\n2.72 %\n\n–\n\n4.78 %\n\n \n\n \n\n \n\n10,805 \n\n \n\n \n\n \n\n12,305 \n\n \n\n2016 issuance of $ 19.8 billion (a) \n\n \n\n \n\n–\n\n \n\n \n\n2.00 %\n\n–\n\n3.95 %\n\n \n\n \n\n2.10 %\n\n–\n\n4.03 %\n\n \n\n \n\n \n\n9,430 \n\n \n\n \n\n \n\n12,180 \n\n \n\n2017 issuance of $ 17.0 billion (a) \n\n \n\n \n\n–\n\n \n\n \n\n2.88 %\n\n–\n\n4.50 %\n\n \n\n \n\n3.04 %\n\n–\n\n4.53 %\n\n \n\n \n\n \n\n8,945 \n\n \n\n \n\n \n\n10,695 \n\n \n\n2020 issuance of $ 10.0 billion (a) \n\n \n\n \n\n–\n\n \n\n \n\n2.53 %\n\n–\n\n2.68 %\n\n \n\n \n\n2.53 %\n\n–\n\n2.68 %\n\n \n\n \n\n \n\n10,000 \n\n \n\n \n\n \n\n10,000 \n\n \n\n2021 issuance of $ 8.2 billion (a) \n\n \n\n \n\n–\n\n \n\n \n\n2.92 %\n\n–\n\n3.04 %\n\n \n\n \n\n2.92 %\n\n–\n\n3.04 %\n\n \n\n \n\n \n\n8,185 \n\n \n\n \n\n \n\n8,185 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal face value\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n55,511 \n\n \n\n \n\n \n\n63,910 \n\n \n\nUnamortized discount and issuance costs\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 471 \n\n)\n\n \n\n \n\n( 511 \n\n)\n\nHedge fair value adjustments ( b ) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 68 \n\n)\n\n \n\n \n\n \n\nPremium on debt exchange (a) \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 5,191 \n\n)\n\n \n\n \n\n( 5,293 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal debt\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n49,781 \n\n \n\n \n\n \n\n58,146 \n\n \n\nCurrent portion of long-term debt\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 2,749 \n\n)\n\n \n\n \n\n( 8,072 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nLong-term debt\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n47,032 \n\n \n\n \n\n$\n\n50,074 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\n##TABLE_START (a) \n\nIn March 2021 and June 2020, we exchanged a portion of our existing debt at a premium for cash and new debt with longer maturities. The premiums are amortized over the terms of the new debt. \n\n##TABLE_END\n\n##TABLE_START (b) \n\nRefer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt. \n\n##TABLE_END\n\nAs of June 30, 2022 and 2021, the estimated fair value of long-term debt, including the current portion, was $ 50.9 billion and $ 70.0 billion, respectively. The estimated fair values are based on Level 2 inputs. \n\nDebt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2022, 2021, and 2020 was $ 1.9 billion, $ 2.0 billion, and $ 2.4 billion, respectively . \n\nThe following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2022: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ending June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n2,750 \n\n \n\n \n\n \n\n5,250 \n\n \n\n \n\n \n\n2,250 \n\n \n\n \n\n \n\n3,000 \n\n \n\n \n\n \n\n8,000 \n\n \n\nThereafter\n\n \n\n \n\n34,261 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n55,511 \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nNOTE 12 — INCOME TAXES \n\nProvision for Income Taxes \n\nThe components of the provision for income taxes were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCurrent Taxes\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nU.S. federal\n\n \n\n$\n\n8,329 \n\n \n\n \n\n$\n\n3,285 \n\n \n\n \n\n$\n\n3,537 \n\n \n\nU.S. state and local\n\n \n\n \n\n1,679 \n\n \n\n \n\n \n\n1,229 \n\n \n\n \n\n \n\n \n\nForeign\n\n \n\n \n\n6,672 \n\n \n\n \n\n \n\n5,467 \n\n \n\n \n\n \n\n4,444 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCurrent taxes\n\n \n\n$\n\n16,680 \n\n \n\n \n\n$\n\n9,981 \n\n \n\n \n\n$\n\n8,744 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDeferred Taxes\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nU.S. federal\n\n \n\n$\n\n( 4,815 \n\n)\n\n \n\n$\n\n \n\n \n\n$\n\n \n\nU.S. state and local\n\n \n\n \n\n( 1,062 \n\n)\n\n \n\n \n\n( 204 \n\n)\n\n \n\n \n\n( 6 \n\n)\n\nForeign\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 41 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDeferred taxes\n\n \n\n$\n\n( 5,702 \n\n)\n\n \n\n$\n\n( 150 \n\n)\n\n \n\n$\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nProvision for income taxes\n\n \n\n$\n\n10,978 \n\n \n\n \n\n$\n\n9,831 \n\n \n\n \n\n$\n\n8,755 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nU.S. and foreign components of income before income taxes were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nU.S.\n\n \n\n$\n\n47,837 \n\n \n\n \n\n$\n\n34,972 \n\n \n\n \n\n$\n\n24,116 \n\n \n\nForeign \n\n \n\n \n\n35,879 \n\n \n\n \n\n \n\n36,130 \n\n \n\n \n\n \n\n28,920 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nIncome before income taxes\n\n \n\n$\n\n83,716 \n\n \n\n \n\n$\n\n71,102 \n\n \n\n \n\n$\n\n53,036 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nEffective Tax Rate\n\nThe items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows: \n\n \n\n##TABLE_START \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nFederal statutory rate\n\n \n\n \n\n21.0 \n\n%\n\n \n\n \n\n21.0 \n\n%\n\n \n\n \n\n21.0 \n\n%\n\nEffect of:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nForeign earnings taxed at lower rates\n\n \n\n \n\n( 1.3 )\n\n%\n\n \n\n \n\n( 2.7 )\n\n%\n\n \n\n \n\n( 3.7 )\n\n%\n\nImpact of intangible property transfers\n\n \n\n \n\n( 3.9 )\n\n%\n\n \n\n \n\n%\n\n \n\n \n\n%\n\nForeign-derived intangible income deduction\n\n \n\n \n\n( 1.1 )\n\n%\n\n \n\n \n\n( 1.3 )\n\n%\n\n \n\n \n\n( 1.1 )\n\n%\n\nState income taxes, net of federal benefit\n\n \n\n \n\n1.4 \n\n%\n\n \n\n \n\n1.4 \n\n%\n\n \n\n \n\n1.3 \n\n%\n\nResearch and development credit\n\n \n\n \n\n( 0.9 )\n\n%\n\n \n\n \n\n( 0.9 )\n\n%\n\n \n\n \n\n( 1.1 )\n\n%\n\nExcess tax benefits relating to stock-based compensation\n\n \n\n \n\n( 1.9 )\n\n%\n\n \n\n \n\n( 2.4 )\n\n%\n\n \n\n \n\n( 2.2 )\n\n%\n\nInterest, net\n\n \n\n \n\n0.5 \n\n%\n\n \n\n \n\n0.5 \n\n%\n\n \n\n \n\n1.0 \n\n%\n\nOther reconciling items, net\n\n \n\n \n\n( 0.7 )\n\n%\n\n \n\n \n\n( 1.8 )\n\n%\n\n \n\n \n\n1.3 \n\n%\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nEffective rate\n\n \n\n \n\n13.1 \n\n%\n\n \n\n \n\n13.8 \n\n%\n\n \n\n \n\n16.5 \n\n%\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nIn the first quarter of fiscal year 2022, we transferred certain intangible properties from our Puerto Rico subsidiary to the U.S. The transfer of intangible properties resulted in a $ 3.3 billion net income tax benefit in the first quarter of fiscal year 2022, as the value of future U.S. tax deductions exceeds the current tax liability from the U.S. global intangible low-taxed income (“GILTI”) tax.\n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nWe have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $ 620 million in the third quarter of fiscal year 2021 to reflect the results of the India Supreme Court decision impacting fiscal year 1996 through fiscal year 2016 . \n\n \n\nThe decrease from the federal statutory rate in fiscal year 2022 is primarily due to the net income tax benefit related to the transfer of intangible properties, earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2021 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes. The decrease from the federal statutory rate in fiscal year 2020 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, and tax benefits relating to stock-based compensation. In fiscal years 2022, 2021, and 2020, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 71 %, 82 %, and 86 % of our foreign income before tax. Other reconciling items, net consists primarily of tax credits and GILTI tax, and in fiscal year 2021, includes tax benefits from the India Supreme Court decision on withholding taxes. In fiscal years 2022, 2021, and 2020, there were no individually significant other reconciling items.\n\nThe decrease in our effective tax rate for fiscal year 2022 compared to fiscal year 2021 was primarily due to a $ 3.3 billion net income tax benefit in the first quarter of fiscal year 2022 related to the transfer of intangible properties, offset in part by changes in the mix of our income before income taxes between the U.S. and foreign countries, as well as tax benefits in the prior year from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, and final Tax Cuts and Jobs Act (“TCJA”) regulations. The decrease in our effective tax rate for fiscal year 2021 compared to fiscal year 2020 was primarily due to tax benefits from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, final TCJA regulations, and an increase in tax benefits relating to stock-based compensation.\n\nPART II \n\nItem 8\n\n \n\nThe components of the deferred income tax assets and liabilities were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDeferred Income Tax Assets\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nStock-based compensation expense\n\n \n\n$\n\n \n\n \n\n$\n\n \n\nAccruals, reserves, and other expenses\n\n \n\n \n\n2,874 \n\n \n\n \n\n \n\n2,960 \n\n \n\nLoss and credit carryforwards\n\n \n\n \n\n1,546 \n\n \n\n \n\n \n\n1,090 \n\n \n\nAmortization\n\n \n\n \n\n10,656 \n\n \n\n \n\n \n\n6,346 \n\n \n\nLeasing liabilities\n\n \n\n \n\n4,557 \n\n \n\n \n\n \n\n4,060 \n\n \n\nUnearned revenue\n\n \n\n \n\n2,876 \n\n \n\n \n\n \n\n2,659 \n\n \n\nOther\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDeferred income tax assets\n\n \n\n \n\n23,571 \n\n \n\n \n\n \n\n17,936 \n\n \n\nLess valuation allowance\n\n \n\n \n\n( 1,012 \n\n)\n\n \n\n \n\n( 769 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDeferred income tax assets, net of valuation allowance\n\n \n\n$\n\n22,559 \n\n \n\n \n\n$\n\n17,167 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDeferred Income Tax Liabilities\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBook/tax basis differences in investments and debt\n\n \n\n$\n\n( 174 \n\n)\n\n \n\n$\n\n( 2,381 \n\n)\n\nLeasing assets\n\n \n\n \n\n( 4,291 \n\n)\n\n \n\n \n\n( 3,834 \n\n)\n\nDepreciation\n\n \n\n \n\n( 1,602 \n\n)\n\n \n\n \n\n( 1,010 \n\n)\n\nDeferred tax on foreign earnings\n\n \n\n \n\n( 3,104 \n\n)\n\n \n\n \n\n( 2,815 \n\n)\n\nOther\n\n \n\n \n\n( 103 \n\n)\n\n \n\n \n\n( 144 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDeferred income tax liabilities\n\n \n\n$\n\n( 9,274 \n\n)\n\n \n\n$\n\n( 10,184 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet deferred income tax assets\n\n \n\n$\n\n13,285 \n\n \n\n \n\n$\n\n6,983 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nReported As\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOther long-term assets\n\n \n\n$\n\n13,515 \n\n \n\n \n\n$\n\n7,181 \n\n \n\nLong-term deferred income tax liabilities\n\n \n\n \n\n( 230 \n\n)\n\n \n\n \n\n( 198 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet deferred income tax assets\n\n \n\n$\n\n13,285 \n\n \n\n \n\n$\n\n6,983 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\n \n\nDeferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered. \n\nAs of June 30, 2022, we had federal, state, and foreign net operating loss carryforwards of $ 318 million, $ 1.3 billion, and $ 2.1 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2023 through 2042 , if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation but are expected to be realized with the exception of those which have a valuation allowance. As of June 30, 2022, we had $ 1.3 billion federal capital loss carryforwards for U.S. tax purposes from our acquisition of Nuance. The federal capital loss carryforwards are subject to an annual limitation and will expire in various years from fiscal 2023 through 2025 .\n\nThe valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards, federal capital loss carryforwards, and other net deferred tax assets that may not be realized. \n\nIncome taxes paid, net of refunds, were $ 16.0 billion, $ 13.4 billion, and $ 12.5 billion in fiscal years 2022, 2021, and 2020, respectively. \n\nUncertain Tax Positions\n\nGross unrecognized tax benefits related to uncertain tax positions as of June 30, 2022, 2021, and 2020, were $ 15.6 billion, $ 14.6 billion, and $ 13.8 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2022, 2021, and 2020 by $ 13.3 billion, $ 12.5 billion, and $ 12.1 billion, respectively.\n\nPART II \n\nItem 8\n\n \n\nAs of June 30, 2022, 2021, and 2020, we had accrued interest expense related to uncertain tax positions of $ 4.3 billion, $ 4.3 billion, and $ 4.0 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2022, 2021, and 2020 included interest expense related to uncertain tax positions of $ 36 million, $ 274 million, and $ 579 million, respectively, net of income tax benefits.\n\nThe aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBeginning unrecognized tax benefits\n\n \n\n$\n\n14,550 \n\n \n\n \n\n$\n\n13,792 \n\n \n\n \n\n$\n\n13,146 \n\n \n\nDecreases related to settlements\n\n \n\n \n\n( 317 \n\n)\n\n \n\n \n\n( 195 \n\n)\n\n \n\n \n\n( 31 \n\n)\n\nIncreases for tax positions related to the current year\n\n \n\n \n\n1,145 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nIncreases for tax positions related to prior years\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDecreases for tax positions related to prior years\n\n \n\n \n\n( 246 \n\n)\n\n \n\n \n\n( 297 \n\n)\n\n \n\n \n\n( 331 \n\n)\n\nDecreases due to lapsed statutes of limitations\n\n \n\n \n\n \n\n \n\n \n\n( 1 \n\n)\n\n \n\n \n\n( 5 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nEnding unrecognized tax benefits\n\n \n\n$\n\n15,593 \n\n \n\n \n\n$\n\n14,550 \n\n \n\n \n\n$\n\n13,792 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nWe settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. In the second quarter of fiscal year 2021, we settled an additional portion of the IRS audits for tax years 2004 to 2013 and made a payment of $ 1.7 billion, including tax and interest. We remain under audit for tax years 2004 to 2017 .\n\nAs of June 30, 2022, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.\n\nWe are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2021 , some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements. \n\n \n\nNOTE 13 — UNEARNED REVENUE \n\nUnearned revenue by segment was as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nProductivity and Business Processes\n\n \n\n$\n\n24,558 \n\n \n\n \n\n$\n\n22,120 \n\n \n\nIntelligent Cloud\n\n \n\n \n\n19,371 \n\n \n\n \n\n \n\n17,710 \n\n \n\nMore Personal Computing\n\n \n\n \n\n4,479 \n\n \n\n \n\n \n\n4,311 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n48,408 \n\n \n\n \n\n$\n\n44,141 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nChanges in unearned revenue were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30, 2022\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, beginning of period\n\n \n\n \n\n$\n\n44,141 \n\n \n\nDeferral of revenue\n\n \n\n \n\n \n\n110,455 \n\n \n\nRecognition of unearned revenue\n\n \n\n \n\n \n\n( 106,188 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, end of period\n\n \n\n \n\n$\n\n48,408 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nRevenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $ 193 billion as of June 30, 2022, of which $ 189 billion is related to the commercial portion of revenue. We expect to recognize approximately 45 % of this revenue over the next 12 months and the remainder thereafter.\n\nNOTE 14 — LEASES \n\nWe have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of 1 year to 19 years, some of which include options to extend the leases for up to 5 years , and some of which include options to terminate the leases within 1 year. \n\nThe components of lease expense were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOperating lease cost\n\n \n\n$\n\n2,461 \n\n \n\n \n\n$\n\n2,127 \n\n \n\n \n\n$\n\n2,043 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nFinance lease cost:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nAmortization of right-of-use assets\n\n \n\n$\n\n \n\n \n\n$\n\n \n\n \n\n$\n\n \n\nInterest on lease liabilities\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal finance lease cost\n\n \n\n$\n\n1,409 \n\n \n\n \n\n$\n\n1,307 \n\n \n\n \n\n$\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\n \n\nSupplemental cash flow information related to leases was as follows:\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nCash paid for amounts included in the measurement of lease liabilities:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOperating cash flows from operating leases\n\n \n\n$\n\n2,368 \n\n \n\n \n\n$\n\n2,052 \n\n \n\n \n\n$\n\n1,829 \n\n \n\nOperating cash flows from finance leases\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nFinancing cash flows from finance leases\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nRight-of-use assets obtained in exchange for lease obligations:\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOperating leases\n\n \n\n \n\n5,268 \n\n \n\n \n\n \n\n4,380 \n\n \n\n \n\n \n\n3,677 \n\n \n\nFinance leases\n\n \n\n \n\n4,234 \n\n \n\n \n\n \n\n3,290 \n\n \n\n \n\n \n\n3,467 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nSupplemental balance sheet information related to leases was as follows:\n\n \n\n##TABLE_START (In millions, except lease term and discount rate)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOperating Leases\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOperating lease right-of-use assets\n\n \n\n$\n\n13,148 \n\n \n\n \n\n$\n\n11,088 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOther current liabilities\n\n \n\n$\n\n2,228 \n\n \n\n \n\n$\n\n1,962 \n\n \n\nOperating lease liabilities\n\n \n\n \n\n11,489 \n\n \n\n \n\n \n\n9,629 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal operating lease liabilities\n\n \n\n$\n\n13,717 \n\n \n\n \n\n$\n\n11,591 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nFinance Leases\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nProperty and equipment, at cost\n\n \n\n$\n\n17,388 \n\n \n\n \n\n$\n\n14,107 \n\n \n\nAccumulated depreciation\n\n \n\n \n\n( 3,285 \n\n)\n\n \n\n \n\n( 2,306 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nProperty and equipment, net\n\n \n\n$\n\n14,103 \n\n \n\n \n\n$\n\n11,801 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOther current liabilities\n\n \n\n$\n\n1,060 \n\n \n\n \n\n$\n\n \n\nOther long-term liabilities\n\n \n\n \n\n13,842 \n\n \n\n \n\n \n\n11,750 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal finance lease liabilities\n\n \n\n$\n\n14,902 \n\n \n\n \n\n$\n\n12,541 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nWeighted Average Remaining Lease Term\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOperating leases\n\n \n\n \n\n8 years\n\n \n\n \n\n \n\n8 years\n\n \n\nFinance leases\n\n \n\n \n\n12 years\n\n \n\n \n\n \n\n12 years\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nWeighted Average Discount Rate\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOperating leases\n\n \n\n \n\n2.1 %\n\n \n\n \n\n \n\n2.2 %\n\n \n\nFinance leases\n\n \n\n \n\n3.1 %\n\n \n\n \n\n \n\n3.4 %\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nThe following table outlines maturities of our lease liabilities as of June 30, 2022:\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ending June 30,\n\n \n\nOperating\n\nLeases\n\n \n\n \n\nFinance\n\nLeases\n\n \n\n \n\n \n\n \n\n \n\n$\n\n2,456 \n\n \n\n \n\n$\n\n1,477 \n\n \n\n \n\n \n\n2,278 \n\n \n\n \n\n \n\n1,487 \n\n \n\n \n\n \n\n1,985 \n\n \n\n \n\n \n\n1,801 \n\n \n\n \n\n \n\n1,625 \n\n \n\n \n\n \n\n1,483 \n\n \n\n \n\n \n\n1,328 \n\n \n\n \n\n \n\n1,489 \n\n \n\nThereafter\n\n \n\n \n\n5,332 \n\n \n\n \n\n \n\n9,931 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal lease payments\n\n \n\n \n\n15,004 \n\n \n\n \n\n \n\n17,668 \n\n \n\nLess imputed interest\n\n \n\n \n\n( 1,287 \n\n)\n\n \n\n \n\n( 2,766 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n13,717 \n\n \n\n \n\n$\n\n14,902 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nAs of June 30, 2022, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $ 7.2 billion and $ 8.8 billion, respectively. These operating and finance leases will commence between fiscal year 2023 and fiscal year 2028 with lease terms of 1 year to 18 years .\n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nNOTE 15 — CONTINGENCIES \n\nAntitrust Litigation and Claims \n\nChina State Administration for Market Regulation Investigatio n \n\nIn 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. In 2019, the SAMR presented preliminary views as to certain possible violations of China’s Anti-Monopoly Law.\n\nProduct-Related Litigation \n\nU.S. Cell Phone Litigation \n\nMicrosoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 46 lawsuits, including 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines. \n\nIn 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing on general causation is scheduled for September of 2022 . \n\nOther Contingencies \n\nWe also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. \n\nAs of June 30, 2022, we accrued aggregate legal liabilities of $ 364 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $ 600 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable. \n\nPART II \n\nItem 8\n\n \n\nNOTE 16 — STOCKHOLDERS’ EQUITY \n\nShares Outstanding \n\nShares of common stock outstanding were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, beginning of year\n\n \n\n \n\n7,519 \n\n \n\n \n\n \n\n7,571 \n\n \n\n \n\n \n\n7,643 \n\n \n\nIssued\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nRepurchased\n\n \n\n \n\n( 95 \n\n)\n\n \n\n \n\n( 101 \n\n)\n\n \n\n \n\n( 126 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, end of year\n\n \n\n \n\n7,464 \n\n \n\n \n\n \n\n7,519 \n\n \n\n \n\n \n\n7,571 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\nShare Repurchases \n\nOn September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $ 40.0 billion in share repurchases. This share repurchase program commenced in December 2016 and was completed in February 2020. \n\nOn September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $ 40.0 billion in share repurchases. This share repurchase program commenced in February 2020 and was completed in November 2021.\n\nOn September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $ 60.0 billion in share repurchases. This share repurchase program commenced in November 2021, following completion of the program approved on September 18, 2019, has no expiration date, and may be terminated at any time. As of June 30, 2022, $ 40.7 billion remained of this $ 60.0 billion share repurchase program.\n\nWe repurchased the following shares of common stock under the share repurchase programs:\n\n \n\n##TABLE_START (In millions)\n\n \n\nShares\n\n \n\n \n\nAmount\n\n \n\n \n\nShares\n\n \n\n \n\nAmount\n\n \n\n \n\nShares\n\n \n\n \n\nAmount\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nFirst Quarter\n\n \n\n \n\n \n\n \n\n$\n\n6,200 \n\n \n\n \n\n \n\n \n\n \n\n$\n\n5,270 \n\n \n\n \n\n \n\n \n\n \n\n$\n\n4,000 \n\n \n\nSecond Quarter\n\n \n\n \n\n \n\n \n\n \n\n6,233 \n\n \n\n \n\n \n\n \n\n \n\n \n\n5,750 \n\n \n\n \n\n \n\n \n\n \n\n \n\n4,600 \n\n \n\nThird Quarter\n\n \n\n \n\n \n\n \n\n \n\n7,800 \n\n \n\n \n\n \n\n \n\n \n\n \n\n5,750 \n\n \n\n \n\n \n\n \n\n \n\n \n\n6,000 \n\n \n\nFourth Quarter\n\n \n\n \n\n \n\n \n\n \n\n7,800 \n\n \n\n \n\n \n\n \n\n \n\n \n\n6,200 \n\n \n\n \n\n \n\n \n\n \n\n \n\n5,088 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n \n\n \n\n \n\n$\n\n28,033 \n\n \n\n \n\n \n\n \n\n \n\n$\n\n22,970 \n\n \n\n \n\n \n\n \n\n \n\n$\n\n19,688 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nAll repurchases were made using cash resources. Shares repurchased during the fourth and third quarters of fiscal year 2022 were under the share repurchase program approved on September 14, 2021. Shares repurchased during the second quarter of fiscal year 2022 were under the share repurchase programs approved on both September 14, 2021 and September 18, 2019. Shares repurchased during the first quarter of fiscal year 2022, fiscal year 2021, and the fourth quarter of fiscal year 2020 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $ 4.7 billion, $ 4.4 billion, and $ 3.3 billion for fiscal years 2022, 2021, and 2020, respectively.\n\nPART II \n\nItem 8\n\n \n\nDividends \n\nOur Board of Directors declared the following dividends: \n\n \n\n##TABLE_START Declaration Date\n\nRecord Date \n\n \n\n \n\nPayment Date \n\n \n\nDividend\n\nPer Share \n\n \n\n \n\nAmount \n\n \n\n \n\n \n\n \n\n \n\nFiscal Year 2022\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n(In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nSeptember 14, 2021 \n\n \n\n \n\nNovember 18, 2021 \n\n \n\n \n\n \n\nDecember 9, 2021 \n\n \n\n \n\n$\n\n0.62 \n\n \n\n \n\n$\n\n4,652 \n\n \n\nDecember 7, 2021 \n\n \n\n \n\nFebruary 17, 2022 \n\n \n\n \n\n \n\nMarch 10, 2022 \n\n \n\n \n\n \n\n0.62 \n\n \n\n \n\n \n\n4,645 \n\n \n\nMarch 14, 2022 \n\n \n\n \n\nMay 19, 2022 \n\n \n\n \n\n \n\nJune 9, 2022 \n\n \n\n \n\n \n\n0.62 \n\n \n\n \n\n \n\n4,632 \n\n \n\nJune 14, 2022 \n\n \n\n \n\nAugust 18, 2022 \n\n \n\n \n\n \n\nSeptember 8, 2022 \n\n \n\n \n\n \n\n0.62 \n\n \n\n \n\n \n\n4,627 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n2.48 \n\n \n\n \n\n$\n\n18,556 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nFiscal Year 2021\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nSeptember 15, 2020 \n\n \n\n \n\nNovember 19, 2020 \n\n \n\n \n\n \n\nDecember 10, 2020 \n\n \n\n \n\n$\n\n0.56 \n\n \n\n \n\n$\n\n4,230 \n\n \n\nDecember 2, 2020 \n\n \n\n \n\nFebruary 18, 2021 \n\n \n\n \n\n \n\nMarch 11, 2021 \n\n \n\n \n\n \n\n0.56 \n\n \n\n \n\n \n\n4,221 \n\n \n\nMarch 16, 2021 \n\n \n\n \n\nMay 20, 2021 \n\n \n\n \n\n \n\nJune 10, 2021 \n\n \n\n \n\n \n\n0.56 \n\n \n\n \n\n \n\n4,214 \n\n \n\nJune 16, 2021 \n\n \n\n \n\nAugust 19, 2021 \n\n \n\n \n\n \n\nSeptember 9, 2021 \n\n \n\n \n\n \n\n0.56 \n\n \n\n \n\n \n\n4,206 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n$\n\n2.24 \n\n \n\n \n\n$\n\n16,871 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nThe dividend declared on June 14, 2022 was included in other current liabilities as of June 30, 2022. \n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nNOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) \n\nThe following table summarizes the changes in accumulated other comprehensive income (loss) by component :\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDerivatives\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, beginning of period\n\n \n\n$\n\n( 19 \n\n)\n\n \n\n$\n\n( 38 \n\n)\n\n \n\n$\n\n \n\nUnrealized gains (losses), net of tax of $( 15 ) , $ 9 , and $( 10 )\n\n \n\n \n\n( 57 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 38 \n\n)\n\nReclassification adjustments for (gains) losses included in other income (expense), net\n\n \n\n \n\n \n\n \n\n \n\n( 17 \n\n)\n\n \n\n \n\n \n\nTax expense (benefit) included in provision for income taxes\n\n \n\n \n\n( 16 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nAmounts reclassified from accumulated other comprehensive income (loss)\n\n \n\n \n\n \n\n \n\n \n\n( 15 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet change related to derivatives, net of tax of $ 1 , $ 7 , and $( 10 )\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n( 38 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, end of period\n\n \n\n$\n\n( 13 \n\n)\n\n \n\n$\n\n( 19 \n\n)\n\n \n\n$\n\n( 38 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nInvestments\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, beginning of period\n\n \n\n$\n\n3,222 \n\n \n\n \n\n$\n\n5,478 \n\n \n\n \n\n$\n\n1,488 \n\n \n\nUnrealized gains (losses), net of tax of $( 1,440 ) , $( 589 ), and $ 1,057 \n\n \n\n \n\n( 5,405 \n\n)\n\n \n\n \n\n( 2,216 \n\n)\n\n \n\n \n\n3,987 \n\n \n\nReclassification adjustments for (gains) losses included in other income (expense), net\n\n \n\n \n\n \n\n \n\n \n\n( 63 \n\n)\n\n \n\n \n\n \n\nTax expense (benefit) included in provision for income taxes\n\n \n\n \n\n( 12 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 1 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nAmounts reclassified from accumulated other comprehensive income (loss)\n\n \n\n \n\n \n\n \n\n \n\n( 50 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNet change related to investments, net of tax of $( 1,428 ) , $( 602 ), and $ 1,058 \n\n \n\n \n\n( 5,360 \n\n)\n\n \n\n \n\n( 2,266 \n\n)\n\n \n\n \n\n3,990 \n\n \n\nCumulative effect of accounting changes\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, end of period\n\n \n\n$\n\n( 2,138 \n\n)\n\n \n\n$\n\n3,222 \n\n \n\n \n\n$\n\n5,478 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTranslation Adjustments and Other\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, beginning of period\n\n \n\n$\n\n( 1,381 \n\n)\n\n \n\n$\n\n( 2,254 \n\n)\n\n \n\n$\n\n ( 1,828 \n\n)\n\nTranslation adjustments and other, net of tax of $ 0 , $( 9 ), and $ 1 \n\n \n\n \n\n( 1,146 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n( 426 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nBalance, end of period\n\n \n\n$\n\n( 2,527 \n\n)\n\n \n\n$\n\n( 1,381 \n\n)\n\n \n\n$\n\n( 2,254 \n\n)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nAccumulated other comprehensive income (loss), end of period\n\n \n\n$\n\n( 4,678 \n\n)\n\n \n\n$\n\n1,822 \n\n \n\n \n\n$\n\n3,186 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nNOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS \n\nWe grant stock-based compensation to employees and directors. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.\n\nStock-based compensation expense and related income tax benefits were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nStock-based compensation expense\n\n \n\n$\n\n7,502 \n\n \n\n \n\n$\n\n6,118 \n\n \n\n \n\n$\n\n5,289 \n\n \n\nIncome tax benefits related to stock-based compensation\n\n \n\n \n\n1,293 \n\n \n\n \n\n \n\n1,065 \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\nStock Plans\n\nStock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of four years or five years . \n\nPART II \n\nItem 8\n\n \n\nExecutive Incentive Plan \n\nUnder the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of four years . PSUs generally vest over a performance period of three years . The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved.\n\nActivity for All Stock Plans \n\nThe fair value of stock awards was estimated on the date of grant using the following assumptions:\n\n \n\n##TABLE_START \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nDividends per share (quarterly amounts)\n\n \n\n$\n\n0.56 \n\n–\n\n0.62 \n\n \n\n$\n\n \n\n0.51 \n\n–\n\n0.56 \n\n \n\n \n\n$\n\n0.46 \n\n–\n\n0.51 \n\n \n\nInterest rates\n\n \n\n \n\n0.03 %\n\n–\n\n3.6 %\n\n \n\n \n\n \n\n0.01 %\n\n–\n\n1.5 %\n\n \n\n \n\n \n\n0.1 %\n\n–\n\n2.2 %\n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nDuring fiscal year 2022, the following activity occurred under our stock plans: \n\n \n\n##TABLE_START Shares\n\n \n\n \n\nWeighted Average\n\nGrant-Date Fair\n\nValue\n\n \n\n \n\n \n\n \n\n \n\n(In millions)\n\n \n\n \n\n \n\n \n\n \n\nStock Awards\n\n \n\n \n\n \n\n \n\nNonvested balance, beginning of year\n\n \n\n \n\n \n\n \n\n $\n\n152.51 \n\n \n\nGranted (a) \n\n \n\n \n\n \n\n \n\n \n\n291.22 \n\n \n\nVested\n\n \n\n \n\n( 47 \n\n) \n\n \n\n \n\n143.10 \n\n \n\nForfeited\n\n \n\n \n\n( 10 \n\n) \n\n \n\n \n\n189.88 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nNonvested balance, end of year\n\n \n\n \n\n \n\n \n\n $\n\n227.59 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\n##TABLE_START (a) \n\nIncludes 1 million, 2 million, and 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2022, 2021, and 2020, respectively. \n\n##TABLE_END\n\n \n\nAs of June 30, 2022, there was approximately $ 16.7 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of three years . The weighted average grant-date fair value of stock awards granted was $ 291.22 , $ 221.13 , and $ 140.49 for fiscal years 2022, 2021, and 2020, respectively. The fair value of stock awards vested was $ 14.1 billion, $ 13.4 billion, and $ 10.1 billion, for fiscal years 2022, 2021, and 2020, respectively. As of June 30, 2022, an aggregate of 211 million shares were authorized for future grant under our stock plans.\n\nEmployee Stock Purchase Plan \n\nWe have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90 % of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15 % of their gross compensation during an offering period. Under the terms of the ESPP that were approved in 2012, the plan was set to terminate on December 31, 2022. At our 2021 Annual Shareholders Meeting, our shareholders approved a successor ESPP with a January 1, 2022 effective date and ten-year expiration of December 31, 2031. No additional shares were requested at this meeting.\n\nEmployees purchased the following shares during the periods presented: \n\n \n\n##TABLE_START (Shares in millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nShares purchased\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nAverage price per share\n\n \n\n$\n\n259.55 \n\n \n\n \n\n$\n\n207.88 \n\n \n\n \n\n$\n\n142.22 \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nAs of June 30, 2022, 81 million shares of our common stock were reserved for future issuance through the ESPP. \n\nPART II \n\nItem 8\n\n \n\nSavings Plans \n\nWe have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We match a portion of each dollar a participant contributes into the plans. Employer-funded retirement benefits for all plans were $ 1.4 billion, $ 1.2 billion, and $ 1.0 billion in fiscal years 2022, 2021, and 2020, respectively, and were expensed as contributed.\n\nNOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA \n\nIn its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. \n\nOur reportable segments are described below. \n\nProductivity and Business Processes \n\nOur Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:\n\n##TABLE_START \n\n• \n\nOffice Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Microsoft Viva.\n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nOffice Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other Office services.\n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nLinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions.\n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nDynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Customer Insights, Power Apps, and Power Automate; and on-premises ERP and CRM applications.\n\n##TABLE_END\n\nIntelligent Cloud \n\nOur Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises: \n\n##TABLE_START \n\n• \n\nServer products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub. \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nEnterprise Services, including Enterprise Support Services, Microsoft Consulting Services, and Nuance professional services. \n\n##TABLE_END\n\nMore Personal Computing \n\nOur More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises: \n\n##TABLE_START \n\n• \n\nWindows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things. \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nDevices, including Surface and PC accessories. \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nGaming, including Xbox hardware and Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, third-party disc royalties, advertising, and other cloud services. \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nSearch and news advertising. \n\n##TABLE_END\n\nPART II \n\nItem 8\n\n \n\n \n\nRevenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin. \n\nIn addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. \n\nSegment revenue and operating income were as follows during the periods presented:\n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nRevenue\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nProductivity and Business Processes\n\n \n\n$\n\n63,364 \n\n \n\n \n\n$\n\n53,915 \n\n \n\n \n\n$\n\n46,398 \n\n \n\nIntelligent Cloud\n\n \n\n \n\n75,251 \n\n \n\n \n\n \n\n60,080 \n\n \n\n \n\n \n\n48,366 \n\n \n\nMore Personal Computing\n\n \n\n \n\n59,655 \n\n \n\n \n\n \n\n54,093 \n\n \n\n \n\n \n\n48,251 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n198,270 \n\n \n\n \n\n$\n\n168,088 \n\n \n\n \n\n$\n\n143,015 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nOperating Income \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nProductivity and Business Processes\n\n \n\n$\n\n29,687 \n\n \n\n \n\n$\n\n24,351 \n\n \n\n \n\n$\n\n18,724 \n\n \n\nIntelligent Cloud\n\n \n\n \n\n32,721 \n\n \n\n \n\n \n\n26,126 \n\n \n\n \n\n \n\n18,324 \n\n \n\nMore Personal Computing\n\n \n\n \n\n20,975 \n\n \n\n \n\n \n\n19,439 \n\n \n\n \n\n \n\n15,911 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n83,383 \n\n \n\n \n\n$\n\n69,916 \n\n \n\n \n\n$\n\n52,959 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nNo sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2022, 2021, or 2020. Revenue, classified by the major geographic areas in which our customers were located, was as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nUnited States (a) \n\n \n\n$\n\n100,218 \n\n \n\n \n\n$\n\n83,953 \n\n \n\n \n\n$\n\n73,160 \n\n \n\nOther countries\n\n \n\n \n\n98,052 \n\n \n\n \n\n \n\n84,135 \n\n \n\n \n\n \n\n69,855 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n198,270 \n\n \n\n \n\n$\n\n168,088 \n\n \n\n \n\n$\n\n143,015 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\n##TABLE_START (a) \n\nIncludes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue. \n\n##TABLE_END\n\nPART II \n\nItem 8\n\n \n\nRevenue, classified by significant product and service offerings, was as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nYear Ended June 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nServer products and cloud services\n\n \n\n$\n\n67,321 \n\n \n\n \n\n$\n\n52,589 \n\n \n\n \n\n$\n\n41,379 \n\n \n\nOffice products and cloud services\n\n \n\n \n\n44,862 \n\n \n\n \n\n \n\n39,872 \n\n \n\n \n\n \n\n35,316 \n\n \n\nWindows\n\n \n\n \n\n24,761 \n\n \n\n \n\n \n\n22,488 \n\n \n\n \n\n \n\n21,510 \n\n \n\nGaming\n\n \n\n \n\n16,230 \n\n \n\n \n\n \n\n15,370 \n\n \n\n \n\n \n\n11,575 \n\n \n\nLinkedIn\n\n \n\n \n\n13,816 \n\n \n\n \n\n \n\n10,289 \n\n \n\n \n\n \n\n8,077 \n\n \n\nSearch and news advertising\n\n \n\n \n\n11,591 \n\n \n\n \n\n \n\n9,267 \n\n \n\n \n\n \n\n8,524 \n\n \n\nEnterprise Services\n\n \n\n \n\n7,407 \n\n \n\n \n\n \n\n6,943 \n\n \n\n \n\n \n\n6,409 \n\n \n\nDevices\n\n \n\n \n\n6,991 \n\n \n\n \n\n \n\n6,791 \n\n \n\n \n\n \n\n6,457 \n\n \n\nOther \n\n \n\n \n\n5,291 \n\n \n\n \n\n \n\n4,479 \n\n \n\n \n\n \n\n3,768 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n198,270 \n\n \n\n \n\n$\n\n168,088 \n\n \n\n \n\n$\n\n143,015 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nWe have recast certain previously reported amounts in the table above to conform to the way we internally manage and monitor our business.\n\nOur Microsoft Cloud (formerly commercial cloud) revenue, which includes Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $ 91.2 billion, $ 69.1 billion and $ 51.7 billion in fiscal years 2022, 2021, and 2020, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, and LinkedIn in the table above.\n\nAssets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.\n\nLong-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows: \n\n \n\n##TABLE_START (In millions)\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nJune 30,\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nUnited States\n\n \n\n$\n\n106,430 \n\n \n\n \n\n$\n\n76,153 \n\n \n\n \n\n$\n\n60,789 \n\n \n\nIreland\n\n \n\n \n\n15,505 \n\n \n\n \n\n \n\n13,303 \n\n \n\n \n\n \n\n12,734 \n\n \n\nOther countries\n\n \n\n \n\n44,433 \n\n \n\n \n\n \n\n38,858 \n\n \n\n \n\n \n\n29,770 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\nTotal\n\n \n\n$\n\n166,368 \n\n \n\n \n\n$\n\n 128,314 \n\n \n\n \n\n$\n\n 103,293 \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n##TABLE_END\n\n \n\nPART II \n\nItem 8\n\n \n\n \n\nREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM\n\nTo the Stockholders and the Board of Directors of Microsoft Corporation \n\nOpinion on the Financial Statements\n\nWe have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2022 and 2021, the related consolidated statements of income, comprehensive income, cash flows, and stockholders\' equity, for each of the three years in the period ended June 30, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.\n\nWe have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company\'s internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 28, 2022, expressed an unqualified opinion on the Company\'s internal control over financial reporting.\n\nBasis for Opinion\n\nThese financial statements are the responsibility of the Company\'s management. Our responsibility is to express an opinion on the Company\'s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.\n\nWe conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.\n\nCritical Audit Matters\n\nThe critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.\n\nPART II \n\nItem 8\n\n \n\n \n\nRevenue Recognition – Refer to Note 1 to the financial statements\n\nCritical Audit Matter Description\n\nThe Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.\n\nSignificant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:\n\n##TABLE_START \n\n• \n\nDetermination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services. \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nThe pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nIdentification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services). \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nDetermination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. \n\n \n\n##TABLE_END\n\nGiven these factors and due to the volume of transactions, the related audit effort in evaluating management\'s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.\n\nHow the Critical Audit Matter Was Addressed in the Audit\n\nOur principal audit procedures related to the Company\'s revenue recognition for these customer agreements included the following:\n\n##TABLE_START \n\n• \n\nWe tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration. \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nWe evaluated management\'s significant accounting policies related to these customer agreements for reasonableness. \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nWe selected a sample of customer agreements and performed the following procedures: \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n- \n\nObtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.\n\n \n\n##TABLE_END\n\n##TABLE_START \n\n- \n\nTested management\'s identification and treatment of contract terms. \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n- \n\nAssessed the terms in the customer agreement and evaluated the appropriateness of management\'s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.\n\n \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nWe evaluated the reasonableness of management\'s estimate of stand-alone selling prices for products and services that are not sold separately. \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nWe tested the mathematical accuracy of management\'s calculations of revenue and the associated timing of revenue recognized in the financial statements. \n\n \n\n##TABLE_END\n\nPART II \n\nItem 8\n\n \n\n \n\nIncome Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements\n\nCritical Audit Matter Description\n\nThe Company\'s long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service ("IRS"). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company\'s financial statements. \n\nConclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management\'s estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.\n\nHow the Critical Audit Matter Was Addressed in the Audit\n\nOur principal audit procedures to evaluate management\'s estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:\n\n##TABLE_START \n\n• \n\nWe evaluated the appropriateness and consistency of management\'s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nWe read and evaluated management\'s documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nWe tested the reasonableness of management\'s judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions. \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nFor those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions. \n\n \n\n##TABLE_END\n\n##TABLE_START \n\n• \n\nWe evaluated the reasonableness of management\'s estimates by considering how tax law, including statutes, regulations and case law, impacted management\'s judgments. \n\n \n\n##TABLE_END\n\n \n\n/s/ D ELOITTE & T OUCHE LLP \n\n \n\nSeattle, Washington \n\nJuly 28, 2022\n\n \n\nWe have served as the Company\'s auditor since 1983.\n\n \n\n \n\nPART II \n\nItem 9, 9A\n\n \n\n \n\n'}